WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

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www.westport.com TABLE OF CONTENTS

LETTER TO SHAREHOLDERS 3 SUSTAINABILITY REPORT 5

CATALYST FOR INNOVATION 5

KEY COLLABORATIONS 7

THE REPORT: OUR APPROACH AND SCOPE 9

FOOTNOTES 13

MANAGEMENT'S DISCUSSION & ANALYSIS 14

BUSINESS OVERVIEW 14

GENERAL DEVELOPMENTS 16

SELECTED ANNUAL FINANCIAL INFORMATION 17

RESULTS FROM OPERATIONS 18

CAPITAL REQUIREMENTS, RESOURCES & LIQUIDITY 23

CONTRACTUAL OBLIGATIONS & COMMITMENTS 24

CONTINGENT OFF-BALANCE SHEET ARRANGEMENTS 26

SHARES OUTSTANDING 27

CRITICAL ACCOUNTING POLICIES & ESTIMATES 27

NEW ACCOUNTING PRONOUNCEMENTS & DEVELOPMENTS 31

DISCLOSURE CONTROLS & PROCEDURES 32

SUMMARY OF QUARTERLY RESULTS 34

RELATED PARTY TRANSACTIONS 36

BUSINESS RISKS & UNCERTAINTIES 36

REPORTS 37 CONSOLIDATED FINANCIAL STATEMENTS 40

CONSOLIDATED BALANCE SHEET 40

CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS) 41

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 42

CONSOLIDATED STATEMENTS OF CASH FLOWS 43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 44

INFORMATION FOR SHAREHOLDERS 70

2 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT LETTER TO SHAREHOLDERS

remains a critical environmental challenge in key markets, LETTER TO we are particularly proud of the announcement for the Cummins Westport ISL G Near Zero NOx natural gas SHAREHOLDERS engine launch, because this product will reduce the already To our shareholders, low NOx emissions from our current Cummins Westport Inc. (“CWI”) engines by another 90%. The transportation sector is undergoing a profound transformation, with the industry expected to change more We continue to invest heavily in delivering the Westport in the next ten years than it has in the past one hundred. high pressure direct injection (“Westport™ HPDI”) 2.0 The Paris Climate Accord signals a strong call to action program to meet the performance and durability standards with more than 175 countries committing to large demanded by our OEM customers. We also announced a greenhouse gas (“GHG”) emissions reductions over the new alliance with AVL of Austria and successfully next 15 years. The increasing availability of low-carbon advanced or completed technology proof of concept studies fuels, the rise of a poly-fuel economy with natural gas, with new OEM partners. The Westport™ HPDI 2.0 electric vehicles, biofuels, and hydrogen competing with program is on schedule, on budget, and expected to be diesel and gasoline, continued technological advancements ready for field test trucks in late 2016, with early and breakthroughs on both incumbent and new production trials commencing in 2017 with our first powertrains, the participation of non-traditional industry demonstration customers. Given the challenge of players like Google and Apple with capital to invest in economically replacing the energy density of fossil fuels, autonomous vehicles, and the emergence of new we believe Westport™ HPDI 2.0 remains the only viable transportation companies like Uber have already begun to alternative fuel solution for heavy-duty vehicles in the influence how people and freight are moved, and how and market today. where we live. Secondly, we said we would rationalize and Our 2015 strategy was crafted to ensure that Westport consolidate our current product portfolio to reduce maintains its position as the global leader in alternative cost, improve margin, ensure customer value and leading fuel solutions for the transportation sector. There were price performance, and achieve full system sales beyond four key elements to this strategy and we had confidence in individual component sales. We delivered examples of this our ability to achieve them despite macro headwinds in in 2015, and the process will continue as we complete our multiple end markets. We are pleased to report our proposed merger with Fuel Systems Solutions, Inc. ("Fuel progress this year. Systems") and rationalize our joint product offerings.

Firstly, Westport is about advanced technology. The Thirdly, we committed to identifying and executing first-generation of natural gas vehicles are now well the sale of non-core assets. We have reached established in the marketplace-with many delivered satisfactory terms with several counterparties, including through our joint ventures or incorporate Westport the previously announced asset sale to Cartesian Capital proprietary components-and with some major customers Group. We will announce details as these transactions now having years of experience, we believe the market close and continue to do so throughout 2016 as we reach opportunity is becoming clear. Customers know what to for synergies following the anticipated merger with Fuel expect and are demanding alternative fuel solutions that Systems. have the performance, cost, and emissions characteristics Finally, as we make the transition from a research and to match the best diesel- and gasoline-powered products development company to a growing and profitable currently available. operating company, we made relentless progress to drive We will continue to invest in our technology portfolio cost efficiencies and reduce our global overhead to deliver the best product solutions to our original expenses. This year was a challenge due to currency equipment manufacturer (“OEM”) customers, who will in volatility and the tremendous uncertainty of global energy turn launch world-leading products that shift the world prices. However, while some lines of business were from its reliance on petroleum-based fuels. In 2015, for seriously impacted by market conditions, we were still able example, we launched the next-generation vehicles with to reduce our operating expenses by $37 million for the Volvo Car and Ford F-150 pickup trucks powered by year, compared to 2014. This came through cost Westport WiNG™ Power System. As urban air quality discipline, prioritization of investments, improved

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 3 LETTER TO SHAREHOLDERS

efficiencies, and some favourable currency exchange OEMs, with the economic benefits of using a less expensive factors. and even renewable fuel like renewable natural gas. According to the California Air Resources Board Low As a result, the Westport Operations business unit’s Carbon Fuel Standard reporting tool, more than 50% of adjusted EBITDA improved significantly to a $1.7 million natural gas vehicles in California are now powered by loss in Q4 2015, compared with $11.6 million in Q4 2014, renewable natural gas from landfills, dairies, and other an 85% improvement. This is despite a drop in revenue sources, rather than fossil natural gas. This is a global year-over-year (partly as a result of our product line trend that we expect to grow rapidly. reduction process). Our cash used in operations during the year saw a similarly dramatic improvement with $46.8 With the compelling performance of next-generation million used in the year, compared with $97.6 million in natural gas vehicles, increased product choice, and 2014, an improvement of 52%. CWI delivered a emissions reductions benefits, we believe that Westport is particularly strong financial performance after two years of well-positioned in key markets and segments as policy warranty reserve adjustments. In addition, CWI had two makers and OEMs bring more alternative fuel solutions important new product announcements that will position into the transportation energy mix. us for a strong performance in 2016. We look forward to continuing to develop our global After the year-end, we strengthened our balance sheet business in 2016, and progressing our vision of a diverse through a strategic financing with Cartesian Capital Group transportation energy mix powered by clean, low-carbon, and the sale of non-core assets. This solid foundation is inexpensive natural gas. On behalf of our Board of expected to be further bolstered following completion of Directors, the management team and employees around the proposed merger with Fuel Systems. We expect that the world, thank you for your continued interest and our proposed merger with Fuel Systems will improve both support for Westport. companies’ competitive positioning across the spectrum Sincerely, going forward. We believe we will have strong offerings at the low-cost end of the spectrum, as well as unique technologies, such as Westport™ HPDI 2.0, for customers demanding the same efficiency, emissions, and engine performance as diesel. We believe that we will have distinctive systems development capabilities for OEMs who are now looking to move into the next generation of David R. Demers Ashoka Achuthan differentiated products. Chief Executive Officer Chief Financial Officer In 2016, we will continue to advance our strategy and focus on the key elements that will drive success which include: • Completion of the proposed Fuel Systems merger including associated integration; • Advancement of Westport™ HPDI 2.0 to commercialization; • Continued rationalization of our portfolio, while maintaining openness to market growth opportunities; • Strengthening of our balance sheet; and • Relentless pursuit of finding cost efficiencies and lowering expenses.

The transportation sector is facing unrelenting pressure to innovate on engine and vehicle performance, find cost reductions, and reduce emissions. The global focus on greenhouse gases also introduces a new opportunity for Westport. Our technologies present the right solutions to

4 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT SUSTAINABILITY REPORT CHANGING THE WAY INCREASED ENGINE THE WORLD MOVES EFFICIENCY The United States Environmental Protection Agency The transportation sector is undergoing profound change, (“EPA”) and the National Highway Traffic Safety with the industry expected to change more in the next ten Administration (“NHTSA”) announced their intention to years than it did in the last 100. The Paris Climate Accord create a national program to establish the next phase of signals a strong call to action as nearly 200 countries greenhouse gas emissions and fuel efficiency standards for committed to large reductions in greenhouse gas (“GHG”) medium- and heavy-duty vehicles. The draft proposal emissions over the next 15 years, quantified carbon dioxide released in July 2015 covered medium- and heavy-duty (“CO2”) mitigation targets, and $100 billion in financing of trucks and commercial vehicles beginning with model year actions. The increasing availability of low-carbon fuels, the 2021 through 2027 and a continuation of the Phase 1 GHG rise of a poly-fuel economy with natural gas, electric rules established from 2014–2018. vehicles, biofuels, and hydrogen competing with diesel and gasoline, continued technological advancements and The agencies sought comments from industry on the breakthroughs on both incumbent and new powertrains, impacts of the rule, and the ability of engine and and the emergence of new transportation companies like technology providers to comply and provide the next Uber have already begun to influence how people and generation of fuel efficient engines. We contributed to this freight are moved, and how and where we live. discussion with our partners by providing comprehensive comments about issues critical to natural gas vehicle Our 2015 Sustainability Report highlights Westport’s compliance and to ensure that the agencies were well updates, progress, and challenges in reaching our vision of informed about the potential of natural gas vehicles to help a sustainable transportation future. We continue to strive meet future GHG limits. A final rule is expected in 2016. to create leading edge technologies that meet or exceed the requirements of legislation and industry codes and Under the draft rule, natural gas engine technologies standards to shift the transportation sector to natural gas. remain a strong pathway for the long term reduction of Working in conjunction with our partners, we are CO2 emissions and will comply with the stringent new committed to delivering low-emission natural gas limits set for medium- and heavy-duty vehicles. solutions that will meet the demand for high-efficiency, high-performance, and low-carbon transportation. IMPROVED URBAN AIR We appreciate your time in reviewing our progress for QUALITY 2015 and welcome your feedback or inquiries. The California Air Resources Board (“CARB”) adopted optional low oxides of nitrogen (“NOx”) emission standards for on-road heavy-duty engines in 2013. For A CATALYST FOR California to meet its 2023 and 2023 ambient ozone air quality standards, CARB estimates that it will require a INNOVATION 90% reduction in NOx emissions below 2010 baseline levels measured in the South Coast air basin. The heightened focus on the environmental performance of the transportation sector with more stringent The Cummins Westport ISL G Near Zero became the first requirements for increased engine efficiency, improved mid-range engine in North America to receive emissions urban air quality, and GHG emission reductions has put certifications from both the U.S. EPA and ARB in pressure on engine and vehicle manufacturers but California that meet the 0.02 g/bhp-hr optional Near Zero introduced an opportunity for collaboration and NOx Emissions standards for medium-duty truck, urban innovation. bus, school bus, and refuse applications. Methane emissions have also been cut dramatically though the combined use of closed crankcase ventilation and revised catalyst formulations. Coupled with renewable natural gas (“RNG”), an ISL G Near Zero will offer zero-emission benefits comparable to an electric vehicle.

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REDUCED GHG EMISSIONS

As an engine and fuel system manufacturer, Westport’s first priority is to ensure that our products comply with the latest and most stringent environmental regulations. This has historically been focused on reducing urban air pollutants, an area where natural gas engines and vehicles have been very successful. Increasingly we are tasked to comply with stringent GHG regulations that focus specifically on reducing carbon dioxide and other greenhouse gases such as methane and nitrous oxide

(“N2O”). Current regulations cover the GHG emissions produced by the engine alone, on a tank-to-wheels (“TTW”) basis. For the CWI ISX12 G, ISL G and ISL G Near Zero engines, the tailpipe CO2, methane, and N2O emissions were taken from EPA and CARB The chemical and physical properties of natural gas certification Executive Orders. HPDI 2.0 attributes are based on Westport internal data. GHG benefits are calculated using the EPA (predominantly methane) position it as a low carbon fuel specified methods applicable to Phase 1 GHG Regulations. for transportation. For every mega Joule (“MJ”) of energy released through the combustion of natural gas, Westport’s North American products are certified in accordance with the relevant stringent regulatory approximately 25% less CO2 emissions are produced compared to combusting diesel or gasoline. requirements set by the EPA and CARB, and with the equivalent regulatory frameworks in place in our global We continuously look for technology solutions to markets. In many of these markets, engine emissions of

simultaneously: both CO2 and methane are measured and accounted for as • Improve engine efficiency (increase the amount of part of the certification process, this ensures compliance energy output per MJ of fuel energy input), with the latest GHG aspects of regulation.

• Reduce CO2 emissions, and With modest engineered enhancements, our product plans • Reduce emissions of methane (using the most advanced will see us fully compliant with even the strictest combustion optimisation tools and techniques). requirements of the newest CO2 regulations out to 2021 and beyond. The Cummins Westport ISL G Near Zero NOx 8.9L engine is scheduled for launch in 2016 will remove a significant source of methane emissions via the use of closed THE POTENTIAL OF RNG crankcase ventilation (“CCV”) technology. As an engine and fuel system manufacturer, our direct Westport™ HPDI 2.0 technology, which is optimum for responsibility is for the performance of fuels in the engines heavy-duty (“HD”) vehicles, includes further we develop and the emissions created by the engine. improvements to maximize the GHG benefits of natural However, when any transportation fuels are used, it is not gas. These include a closer match to the base diesel engine just the direct emissions that are factored in the decision. efficiency, careful optimisation of combustion to limit There are emissions that are generated in the production unburnt methane emissions to less than 0.2% of total fuel of all fuels (i.e. oil extraction, refining, electricity flow, and capture of regulator ventilation. generation, natural gas processing and transmission). When these emissions are taken into account, a well-to- wheel (“WTW”) comparison can be made that includes the carbon intensity in producing, delivering, and combusting fuels.

Depending on the upstream production and supply chain energy and emissions characteristics, some of the low carbon benefit of fossil natural gas is reduced (from ~25% lower to ~17% lower than petroleum). However, transportation grade natural gas is increasingly being

6 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT SUSTAINABILITY REPORT » A CATALYST FOR INNOVATION produced from non-fossil sources, in the form of RNG or since turning these waste products into transportation fuel biomethane. Feedstocks for RNG include landfill gas eliminates direct emissions of CO2 and methane that occur (“LFG”), municipal solid waste (“MSW”), waste water naturally and without any end-use benefit. treatment plants (“WWTP”), or agricultural manure.

In the case of these alternative natural gas feedstocks, substantial carbon intensity reductions can be achieved

This chart shows the fuel carbon intensity on a per unit energy basis. For example, for 1 MJ of energy of CNG made from landfill gas and used in an engine, the total amount of CO2 WTW that results is about 85% lower than using 1 MJ of diesel. This chart addresses only the fuel, and as such does not take into account engine tailpipe emissions of methane, or any differences in engine efficiency.

When vehicle efficiency and tailpipe emissions are accounted for, RNG (in this case from landfill gas) can reduce the greenhouse gas emissions of natural gas heavy KEY COLLABORATIONS duty trucks by approximately 75% compared to the level produced from equivalent diesel trucks[1]. IN 2015 Industry leadership begins with outreach and dialogue and we have contributed to many technical working groups, committees, and advisory panels to learn, share our expertise, and help build a body of knowledge about natural gas vehicles, their benefits, and challenges with deployment.

While the economic value proposition remains the primary driver of natural gas for transportation, policy makers, OEM partners and industry stakeholders are looking to the other compelling energy, environmental, and sustainability benefits. It is critical for Westport to contribute sound, intelligent, data driven, and defensible analysis to a discussion on sustainable mobility and the transition to alternative fuels. Landfill Gas fuel carbon intensity from GREET (greet.es.anl.gov) life- cycle emissions model maintained by Argonne National Labs.

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BUSINESS FOR SOCIAL COP 21 RESPONSIBILITY Implications for the Transport Sector Future of Fuels The Paris Climate Accord signals a strong call to action as www.bsr.org nearly 200 countries committed to large reductions in greenhouse gas emissions over the next 15 years, Westport has been a member of Business for Social quantified CO2 mitigation targets, and $100 billion in Responsibility (“BSR”) since 2012 and was a founding financing of actions. member of the Future of Fuels working group.[2] The mission of Future of Fuels is to identify and promote As part of the many activities concurrent with the annual transportation fuel pathways that enhance the Conference of Parties (“COP”) 21, Westport was invited by sustainability and availability of emerging alternative fuel the World Intellectual Property Organization and the choices. The working group’s objectives are to develop National Institute of Industrial Property (“INPI”), France tools and research to map, measure, and manage a to display Westport™ HPDI technology as part of their sustainable transition to low-carbon commercial freight, innovation poster showcase at the Solutions COP21 convene value chain stakeholders to identify and address exposition in Paris. Westport was one of only two the greatest challenges to the deployment of sustainable Canadian companies selected to display its technology fuels, and build partnerships that catalyze and test low- along with cutting edge sustainable technologies from 70 carbon commercial freight solutions. countries.

In 2015, Future of Fuels published The Sustainability There is an urgent need for sustainable, low-carbon Impacts of Fuel[3] and five fuel briefs (petroleum, natural solutions for the transportation and energy sectors. gas, electrification, hydrogen, biofuels) for sustainability Because natural gas vehicles can operate with 100 percent practitioners outlining tactical approaches to accelerate the renewable natural gas or any percentage of blended transition to low-carbon fuels. The Fuel Sustainability renewable and conventional gas, they are a promising Tool was launched in 2015 to enable corporate decision- technology for freight transportation now and into the makers to compare fuel pathways within different types of future as renewable fuels are expected to represent a fuels used in medium-and heavy-duty trucks. greater market share of fuel consumed. THE CARBON DISCLOSURE ENVIRONMENTAL DEFENSE FUND PROJECT Pump to Wheels Methane Leakage Study www.cdp.net The Environmental Defense Fund (“EDF”) has a history of The Carbon Disclosure Project (“CDP”) is an international, cross-sector collaboration and balanced environmental not-for-profit organization providing the only global analysis. In 2012, the EDF initiated a series of studies with system for companies to measure, disclose, manage and academic and industry partners to better understand the share environmental performance information. It works source and quantity of methane emissions along the with 822 investors with US$95 trillion in assets and holds natural gas supply chain.[5] Westport is a core supporting the largest collection of self-reported corporate climate member of a multi-partner study initiated by EDF and data. conducted by the Center for Alternative Fuels, Engines and We prepared our first CDP report in 2012 and have Emission (“CAFEE”) at West Virginia University. committed to file annual reports detailing our The study was completed in 2015 and provides an environmental performance in accordance with the CDP important data baseline of in-use natural gas vehicles and methodology. Our 2015 report is available for viewing at fueling stations. We anticipate the module covering [4] the CDP website. As a clean technology leader, we natural gas vehicle and fuel systems will be published in recognize that we must accurately account for and mitigate 2016. Participation in working groups and studies of this the environmental impact of natural gas engines and nature help to advance Westport and industry leadership vehicles. Our work with the CDP is a major step in by providing credible and defensible data using widely expanding the reach and rigour of Westport’s accepted methodologies and scientific principles. sustainability transparency.

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findings using the prioritization matrix system OUR APPROACH AND recommended by GRI. While the GRI has recommended that we comply with the G4 guidelines by December 31, 2015, we SCOPE will be able to do so by December 31, 2016. This is our seventh published sustainability report, documenting our strategy, programs and achievements GRI INDICATOR INDEX related to the environment, the safety of people and products, our employees, and our community. The scope of this report relates only to our operations in British LEGEND (we report on this indicator) Columbia, Canada. We have identified a need to extend the AA1 [indicator description] » (report location) scope to encompass all of our global operations and are BB2 (we partially report on this indicator) working to establish processes to achieve this goal. While ECONOMIC PERFORMANCE the majority of our engine testing and development occurs Direct economic value generated and distributed EC1 » (2014 Audited Financial Statements) in Vancouver, we recognize that we must tell a more Financial implications and risks and opportunities of climate complete story about our activities, success and challenges. EC2 change » (Climate Change Risks and Opportunities) This report discloses data from January to December 2015. SOCIAL PERFORMANCE Historical data from the past four fiscal years have been HR3 Employee training on human rights » (Human Rights) included for comparative purposes, where appropriate. Total workforce by employment type, employment contract, and LA1 region » (Employee) Benefits provided to full-time, part-time and temporary LA3 employees » (Employee) Workforce represented in Occupational Health and Safety REPORT CONTENT LA6 Committees » (Health and Safety) LA7 Rates of injury, occupational disease, lost days, and work-related This report has been developed in accordance with the fatalities » (Health and Safety) Nature, scope and effectiveness of programs to manage impact Global Reporting Initiative ("GRI") G3 standard reporting SO1 on communities » (Community Impacts) guidelines. The GRI is an independent institution that SO2 Percentage and total number of business units analyzed for risks provides a standard framework for sustainability reporting related to corruption » (Anti-Corruption Efforts) Percentage of employees trained on anti-corruption policies and across companies and industries. We have applied the SO3 procedures » (Anti-Corruption Efforts) principles of materiality and stakeholder inclusiveness as PR1 Life cycle stages: health and safety impacts of products-assessed recommended by the GRI to assess the relevance of for improvements » (Product Responsibility) Total number of incidents of non-compliance with regulations sustainability priorities to Westport and our stakeholders. PR2 and voluntary codes concerning health and safety impacts of products » (Health and Safety) Westport has self-declared this report to correspond to ENVIRONMENTAL PERFORMANCE application level B in the sex-level grid of the GRI G3 EN3 Direct energy consumption by primary energy source » (Energy) guidelines. Application Level B requires us to disclose our EN4 Indirect energy consumption by primary source » (Energy) performance on at least twenty core economic, social and EN5 Energy saved due to conservation and efficiency efforts environmental indicators. » (Energy) EN6 Initiatives to provide energy-efficient or renewable based products and reductions » (Energy)

DETERMINING MATERIAL ISSUES EN7 Initiatives to reduce indirect energy consumption and reductions achieved » (Energy) The intent of the new GRI G4 materiality review process is EN8 Total water withdrawal by source » (Water) to ensure that content included in our annual sustainability EN16 Total direct and indirect greenhouse gas emissions » (Greenhouse Gas Emissions) report represents the key environmental, economic, and EN18 Initiatives to reduce GHG emissions and reductions achieved social issues that are most critical to our stakeholders. » (Greenhouse Gas Emissions) EN22 Total amount of waste by type and disposal method In 2015 we undertook an extensive internal risk management » (Waste Generation and Diversion) EN23 Total number and volume of significant spills exercise which will guide and supplement our process for » (Waste Generation and Diversion) determining materiality in accordance with the framework EN28 Value of fines and non-monetary sanctions for environmental of the new G4 reporting guidelines. We reviewed our existing non-compliance » (Environmental Compliance) mechanisms for gathering stakeholder feedback and sought additional input where possible to organize our

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SOCIAL PERFORMANCE Our Health and Safety Committee members are champions for workplace safety. Westport maintains a Health and INDICATORS Safety Committee in British Columbia or approximately one Committee for every 300 employees. Our Committees Human Rights are made up of cross-functional management and Westport is dedicated to preserving all fundamental and employee representatives who advise and recommend universally recognized human rights as outlined by the action on any unresolved workplace health and safety United Nations and the International Labour issues brought to them. Organization. Our commitment is stated and reinforced by our Code of Conduct which is reviewed and signed SAFETY INCIDENTS annually by each of our employees. as of Dec. 31 2015 2014 2013 2012 2011 Recordable injury frequency 1 3 5 2 1 Total Workforce Recordable injury rate[7] 0.33 0.96 1.22 0.46 0.31 Lost time injury frequency 1 1 2 1 1 Westport is committed to providing a healthy work Lost time injury rate[8] 0.33 0.32 0.49 0.23 0.31 environment, defined by respectful relationships, professional development and advancement potential and Our rate of recordable injuries and lost time injuries an execution-focused culture to capitalize on business remained in line with our historical average. We continue opportunities. We are dedicated to ensuring that Westport put the health and safety of our employees at the center of remains a desirable employer in all our locations. A similar our operational priorities. benefits package is offered to both full-time and part-time employees.[6] Community Impacts The importance of being a good neighbour is captured TOTAL WORKFORCE within our Environmental Policy statement. Westport’s Fixed Term Full Part Grand geographic location, with our technical facilities adjacent Time Time Payroll Agency Co-op Total as of Dec. 31, 2015 to homes, schools, and other businesses requires us to Argentina 18 10 28 monitor and manage the potentially adverse impacts our Australia 23 1 1 25 operations might have on our immediate neighbors. Canada 282 10 5 5 302 China 32 32 Our Facilities Engineering Group maintains a preventative France 1 1 1 3 maintenance schedule for key equipment to minimize the India 1 1 likelihood of environment releases and noise levels in Italy 234 20 2 5 261 excess of municipal by-laws. Westport responds to Korea 3 3 community concerns regarding our facilities, Netherlands 46 8 1 2 57 Sweden 18 1 2 7 28 infrastructure, noise levels and environmental impacts in a United Kingdom 1 1 timely manner. We received one noise complaint in 2015 United States 66 0 3 7 0 76 associated with the filling of our liquid nitrogen tank and Grand Total 725 30 21 36 5 817 were able to expediently resolve this issue with our neighbour. Health and Safety Anti-Corruption Efforts The health and safety of our employees, facilities, and communities is an integral part of Westport’s operations. Our expectations for individual integrity and ethical, moral When gauging world-class safety performance, recordable and legal conduct are outlined in our Code of Conduct. The injury rates and lost-time injury rates are statistical, Code of Conduct has mandated compliance with all comparative industry measures. Our results are indicative applicable laws in the jurisdictions where we operate and of our ongoing and significant commitment to injury has always prohibited the giving or receiving of improper prevention, risk mitigation, regulatory compliance, and payments to influence business decisions. In addition, continuous safety improvement. Westport maintains a confidential ethics hotline to provide an avenue for employees to raise concerns about corporate conduct. The policy includes the reassurance that they will

10 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT SUSTAINABILITY REPORT » REPORT CONTENT » SOCIAL PERFORMANCE INDICATORS be protected from reprisals or victimization for “whistle Studies have linked participation in these programs with blowing” in good faith. greater academic success, increased self-confidence and self-esteem, and better relationships with peers and adults. Product Responsibility Through this partnership, Westport employees lead classes Quality and safety are imperatives across the product life over seven weeks in cooking, acrobatics, guitar, electronics, cycle. Our Quality Management System (“QMS”) is and visual arts at Lloyd George Elementary School. certified to ISO 9001:2008 standards for the design, assembly, and commercialization of LNG fuel systems. Canadian Blood Services Westport QMS comprises the organization’s policies and Westport has been a member of the Canadian Blood procedures that aim to ensure that customer requirements Services’ Partners for Life Program since 2001. This are met with consistency, resulting in enhanced customer nationwide program is designed to encourage group confidence and satisfaction. The QMS, other internal donations from business and community organizations. requirements and engineering systems have contributed to Each year, we set a target, coordinate group donations and no incidents of non-compliance with regulations and allow employees to take time from work to donate. In voluntary codes concerning the health and safety impacts 2015, we made 60 donations. Since 2006, Westport of our products. Internal systems and processes have been employees have donated over 560 pints of blood or enough established to ensure that the health and safety impacts of to impact more than 120 lives.[9] our products are assessed in each of the following life-cycle stages: ENVIRONMENTAL HEALTH & SAFETY IMPACTS ASSESSED AT LIFE-CYCLE STAGE PERFORMANCE INDICATORS Status Development of product concept YES Environmental Compliance Research and development YES Certification YES Compliance with applicable federal, provincial, and Manufacturing and production YES municipal regulations is a baseline environmental Marketing and promotion YES performance standard and we believe that leading Storage, distribution, and supply YES organizations must go beyond minimum environmental Use and service YES requirements. Since its inception in 1996, Westport has Disposal, reuse or recycling PARTIAL not received any fines or non-monetary sanctions for environmental non-compliance. COMMUNITY ENGAGEMENT Water Being active in the community has always been central to It is expected that climate change will impact global water Westport’s values. Since 2002, Westport has been a strong resources. Water use is an increasingly critical component supporter of the United Way of the Lower Mainland. From of each organization’s sustainability performance. Despite modest beginnings, our annual workplace campaign has this, only the largest industries in British Columbia have grown steadily and in 2015 our cumulative fundraising water meters with data logging capability and the city of total reached $1.272 million CDN. Vancouver does not currently provide meters to light United Way of the Lower Mainland industrial or commercial customers such as Westport. Community Schools Our calculations indicate that Westport facilities cumulatively have an average daily rate of water use of Westport is a proud partner of the United Way and approximately 13.5 m³ per day. Engine and fuel system Vancouver School Board’s Community Schools Program. component testing activities use process water that flows Community schools provide safe and structured after- in a closed-loop thereby minimizing total water school activities to students aged 6-12. After-school withdrawals. Water conserving domestic appliances and programs play a critical role in providing structured, fixtures has been installed at all locations in an effort to supervised time for children to be active, to develop further reduce our impact. We recognize that providing positive social skills, and to build overall capabilities.

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only an estimate and not actual water use is a limitation of necessarily an energy-intensive process. There are our current sustainability report. currently no regulatory requirements for a company of our size to disclose its emissions.[12] The process of compiling a Energy Consumption GHG inventory provides an important foundation for understanding reduction opportunities and measuring Our energy consumption decreased significantly in 2015. progress. Westport works through the internationally- This is due in part to product development cycles but also recognized Carbon Disclosure Project to inventory and to our ability to test components on systems capable of make public our GHG emissions. We have identified future recycling fuel, and a greater focus on energy efficiency opportunities to reduce the impacts of our operations, as improvements. The bulk of our LNG test rigs continue to well as opportunities to integrate climate change risk into operate on liquid nitrogen and we continue to return our risk management procedures and overall business power to the grid through the use of transient strategy. dynamometers in our test cells. Waste Generation and Diversion ENERGY CONSUMPTION for the 12 months ending Dec. 31 Waste reduction, reuse and recycling programs are well (values in gigajoules) 2015 2014 2013 2012 2011 established and well-maintained. Using formulas based on DIRECT bin size and frequency of collection, Westport generates Diesel 749 2,000 2,722 2,250 1,250 approximately 200 tonnes of waste annually. Reducing the LPG 0 0 0 35 99 amount of waste sent to landfill remains a priority and we LNG 5,436 21,730 8,559 8,466 11,193 have launched employee education and awareness efforts CNG 18,887 35,449 38,148 28,802 19,352 to communicate the importance of minimizing the amount NG returned (4,351) (13,937) (1,024) (1,860) (3,663) of waste generated. Net direct consumption 20,721 45,242 48,405 37,693 28,232 We extend the opportunity for employees to recycle electronics, batteries, confidential paper, and some INDIRECT hazardous waste like paint through our waste Electrical 12,576 16,249 14,956 12,239 7,392 minimization program. Our Facilities Engineering Group tracks the amount of waste recycled via our hazardous Greenhouse Gas Emissions waste program, scrap materials collection and office waste initiatives. The Greenhouse Gas Protocol developed by the World Business Council on Sustainable Development TYPES OF HAZARDOUS AND SOLID WASTE RECYCLED (“WBSCD”) is the globally accepted standard for Absorbent pads Beverage & materials Aluminum Batteries containers greenhouse gas emissions accounting. The organizational Cardboard Coolant Diesel E-waste boundary of this inventory includes all of Westport’s Organics & British Columbia-based facilities and includes both scope Filters/rags Light bulbs Lube oil kitchen waste one and scope two emissions.[10] We have not measured Hard & soft Paper plastic Plastic oil pails Solvents scope three emissions to date. Steel Viscor Wastewater Wood

GREENHOUSE GAS INVENTORY[11] (unaudited) for the 12 months ended Dec. 31

(values in tonnes CO2 equivalent) 2015 2014 2013 2012 2011 Total Scope 1 Direct Emissions 1,272.8 2,389.7 2,576.1 2,224.2 1,805.5 Total Scope 2 Indirect Emissions 303.0 413.0 387.0 288.0 237.0 Total GHG impact 1,575.8 2,802.7 2,963.1 2,512.2 2,042.5

Finding comparable organizations against which to benchmark our GHG emissions remains a challenge, as the research and development of new engine technologies is

12 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT SUSTAINABILITY REPORT » FOOTNOTES

11. The GHG Protocol methodology used at this time only FOOTNOTES includes emissions associated with fuel consumption 1. The graphs shown here are illustrative, based on the and not energy and emissions associated with fuel assumptions within GREET. However, the carbon production, distribution and transport. intensity of renewable natural gas can be highly 12. In Canada, Large Final Emitters (“LFEs”)—facilities variable based on the type of feedstock, the geography, that emit the equivalent of 100,000 tonnes or more of energy consumption to produce the biomethane, and carbon dioxide (CO2) equivalents per year—are the outcome for the feedstock if not used to make required to disclose their emissions. RNG. 2. Future of Fuels working group: www.bsr.org/en/our- work/working-groups/future-of-fuels 3. The Sustainability Impacts of Fuel, Future of Fuels: www.bsr.org/en/our-insights/report-view/the- sustainability-impacts-of-fuel 4. Registration at no cost is required to view corporate reports filed on The Carbon Disclosure Project website: www.cdp.net/en-US/Results/Pages/ Company-Responses.aspx?company=36607. 5. The five study modules are production, gathering lines and processing facilities, pipelines and storage, local distribution, and commercial trucks and refueling stations. The first peer-reviewed study has now been published in the journal Proceedings of the National Academy of Science and is available online at www.pnas.org/content/110/44/17768. 6. Part-time employees must work at least three days per week to be eligible for the same benefits package as full-time employees. Casual employees or contractors are not eligible for benefits. 7. The recordable injury incident rate is the annualized rate of occupational injuries and illness per 100 employees. It is a calculation of the number of injuries x 200,000/employee hours worked. First aid classified injuries are not included. 8. The lost time injury rate is a calculation of the total number of lost time injuries x 200,000/employee hours worked. Lost days refer to scheduled work days and the count begins on the next scheduled work day immediately after the injury. 9. According to Canadian Blood Services an average of 4.6 pints are required per patient. 10. Scope One direct Emissions encompass both liquefied and compressed natural gas, diesel, propane, and fuel used in company vehicles. Scope Two indirect Emissions include emissions associated with the purchase and use of electricity.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 13 MANAGEMENT'S DISCUSSION AND ANALYSIS

revenue growth, operating results, liquidity, industry and BASIS OF products, general economy, conditions of the capital and debt markets, government or accounting policies and PRESENTATION regulations, technology innovations, as well as other This Management’s Discussion and Analysis (“MD&A”) factors discussed below and elsewhere in this report, for Westport Innovations Inc. (“Westport”, the including the risk factors contained in the Company’s most “Company”, “we”, “us”, “our”) is intended to assist recent AIF filed on SEDAR at www.sedar.com. The readers in analyzing our financial results and should be forward-looking statements contained in this MD&A are read in conjunction with the audited consolidated financial based upon a number of material factors and assumptions statements, including the accompanying notes, for the which include, without limitation, market acceptance of fiscal year ended December 31, 2015. Our consolidated our products, merger with Fuel Systems Inc., Cartesian financial statements have been prepared in accordance financing, product development delays in contractual with generally accepted accounting principles in the commitments, the ability to attract and retain business United States (“U.S. GAAP”). The Company’s reporting partners, competition from other technologies, price currency is the U.S. dollar. This MD&A is dated as of differential between natural gas and liquefied petroleum March 29, 2016. gas, unforeseen claims, exposure to factors beyond our control as well as the additional factors referenced in our Additional information relating to Westport, including our AIF. Readers should not place undue reliance on any such Annual Information Form (“AIF”) and Form 40-F, is forward-looking statements, which speak only as of the available on SEDAR at www.sedar.com and on EDGAR at date they were made. We disclaim any obligation to www.sec.gov. All financial information is reported in U.S. publicly update or revise such statements to reflect any dollars unless otherwise noted. change in our expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward looking FORWARD LOOKING statements except as required by applicable legislation.

STATEMENTS The forward looking statements contained in this This MD&A contains forward-looking statements that are document speak only as of the date of this MD&A. Except based on the beliefs of management and reflects our as required by applicable legislation, Westport does not current expectations as contemplated under the safe undertake any obligation to release publicly any revisions harbor provisions of Section 21E of the United States to these forward looking statements to reflect events or Securities Act of 1934, as amended. Such statements circumstances after this MD&A, including the occurrence include but are not limited to statements regarding the of unanticipated events. The forward-looking statements orders or demand for our products, our investments, cash contained in this MD&A are expressly qualified by this and capital requirements, the intentions of partners and cautionary statement. potential customers, the performance of our products, our future market opportunities, availability of funding and funding requirements, our estimates and assumptions used in our accounting policies, our accruals, including BUSINESS OVERVIEW warranty accruals, our financial condition, timing of when We are a leading provider of high-performance, low- we will adopt or meet certain accounting and regulatory emission engine and fuel system technologies utilizing standards and the alignment of our business segments. gaseous fuels. Our technology and products enable light- These statements are neither promises nor guarantees but (less than 5.9 litre), medium- (5.9 to 10 litre), heavy-duty- involve known and unknown risks and uncertainties that (10 to 16 litre) and high-horsepower- (greater than 16 litre) may cause our actual results, levels of activity, petroleum-based fuel engines and vehicles to use primarily performance or achievements to be materially different natural gas, giving users a cleaner and generally less from any future results, levels of activity, performance or expensive alternative fuel based on a more abundant achievements expressed in or implied by these forward natural resource. Through our partnerships and direct looking statements. These risks include risks related to sales efforts, we sell natural gas and propane engines, fuel

14 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS » BUSINESS OVERVIEW systems, and components to customers in more than 79 Westport Operations countries. We currently have strategic relationships with three of the world's top four engine producers and supply Westport Operations designs, manufactures and sells or have strategic relationships with six of the world's top compressed natural gas ("CNG"), liquefied natural gas ten truck producers, as well as seven of the world's top ten ("LNG"), and liquefied petroleum gas ("LPG") automotive manufacturers. Our strategic relationships components and systems to over 20 global OEMs, with OEMs provide us with access to their manufacturing including Fiat, Volkswagen, Tata Motors, the GAZ Group, capacity, supply chain and global distribution networks Chrysler, General Motors, Ford Motor Company ("Ford"), without incurring the considerable investment associated PACCAR Inc., Volvo Car Group, Hyundai and Kia and to with these assets. We commercialize our technology in aftermarket customers in over 79 countries. Sales from markets where demand for clean, low emission engines is Westport's wholly-owned Italian subsidiaries, OMVL prevalent. S.p.A. ("OMVL") and Emer S.p.A ("EMER"), including Emer's wholly-owned subsidiary Valtek S.p.A., Westport's Since our founding in 1995, we have invested over $863 Australian operations, and, recently acquired Netherlands million towards the research, development and based Prins Autogassystemen Holding B.V. ("Prins") are commercialization of our proprietary technologies and made either directly to OEMs or through one of their many related products. Conversely, our research and global distributors. Westport Operations has a strong development efforts and investments have resulted in a customer base in Europe and North America and is substantial patent portfolio that serves as the foundation growing in Asia, South America, and Africa. for our differentiated technology offerings and competitive advantage. Our technologies and related products enable Westport supports customers with vehicle conversions combustion engines to use gaseous fuels, such as natural through the Ford Qualified Vehicle Modifier ("QVM") gas, propane, renewable natural gas (“RNG”) or hydrogen. program with products in the Ford line, including transit, The substitution of natural gas for petroleum-based fuel cargo shuttle and taxi vehicles. Sold under the Westport drives a reduction in harmful combustion emissions, such WiNG™ Power System brand, product offerings include as particulate matter and greenhouse gases, in addition to the Ford Transit Van dedicated, F-250/F-350 bi-fuel (CNG providing a relatively inexpensive alternative fuel from a and gasoline) and dedicated, F-450 to F-650, F-59 more plentiful natural resource. dedicated, E-450 dedicated and Transit Connect bi-fuel vehicle models. Westport also provides aftermarket The principle focus of the operating business units are conversion products, alternative fuel systems and summarized below: application engineering.

Other products include Volvo Car bi-fuel systems (CNG OPERATING BUSINESS UNITS and gasoline) for the V60 and V70 bi-fuel wagon; Westport During the first quarter of 2015, Westport realigned the mobile LNG fuel services; Westport iCE PACK™ LNG structure of the Company's internal organization. The Tank System for spark-ignited ("SI") engines; LNG tender realignment combines, our historical operating segments, products for the rail market; and Westport industrial Westport Applied Technologies, Westport On-Road engines sold to Clark Material Handling and Cummins Systems and Westport Off-Road Systems into a single Western Canada for forklift and oilfield applications. operating segment, Westport Operations. This change reflects the manner in which operating decisions and Corporate & Technology assessing business performance is currently managed by Investments the Chief Operating Decision Makers (the CEO and the The Corporate and Technology Investments business unit COO “CODMs”). As Westport narrows its focus within ("Corporate and Technology Investments") is certain business units, including its investments in joint responsible for investments in new research and ventures, and defers certain products and related development programs with OEMs, corporate oversight programs, the CODMs manage the combined businesses as and general administrative duties. Corporate and a whole. Therefore, the Westport Operations segment Technology Investments focuses on long-term product provides more meaningful information to users of development and future return on investments. Once a Westport’s financial statements. All comparable prior period information has been recast to reflect this change.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 15 MANAGEMENT'S DISCUSSION AND ANALYSIS » BUSINESS OVERVIEW

product is launched, the associated revenue will be Managing Partner and Founder of Cartesian, has been recognized under Westport Operations. appointed to Westport's Board of Directors. Cummins Westport Joint Venture On September 1, 2015, the Company announced a proposed business combination (the "Merger") with Fuel Cummins Westport Inc. (“CWI”), our 50:50 joint venture Systems Solutions, Inc. (“Fuel Systems”). Under the with Cummins, Inc., (“Cummins”), serves the medium- to terms of the Merger, the Company will acquire all of the heavy-duty engine markets. CWI engines are offered by outstanding shares of Fuel Systems common stock in a many OEMs for use in transit, school and shuttle buses, stock-for-stock transaction under which Fuel Systems conventional trucks and tractors, and refuse collection shareholders will receive 2.129 Company shares for each trucks, as well as specialty vehicles such as short-haul port share of Fuel Systems common stock they own at closing. drayage trucks and street sweepers. The fuel for CWI engines is typically carried on the vehicles as CNG or LNG. On March 7, 2016, the Company signed an Amendment to CWI engines are produced at certain of Cummins' plants, the Agreement and Plan of Merger (the “Amendment”) allowing CWI to leverage Cummins' manufacturing in relation to the Merger between the Company and Fuel footprint without incurring additional capital costs. CWI Systems. The exchange ratio of the Agreement has been also utilizes Cummins' supply chain, back office systems amended to include a collar mechanism. In the event that and distribution and sales networks. CWI is the leading the NASDAQ volume weighted average price ("VWAP") of supplier of natural gas engines to the North American the Company common shares during a specified measuring medium- and heavy-duty truck and transit bus industries. period is equal to or greater than $2.37, then Fuel Systems stockholders will receive 2.129 Company common shares Weichai Westport Joint Venture per Fuel Systems share on closing of the Merger and through the exchange process. In the event that the Weichai Westport Inc. (“WWI”) is a joint venture between Company’s VWAP is equal to or less than $1.64, then Fuel Westport [35% interest], Weichai Holding Group Co. Ltd. Systems stockholders will receive approximately 3.08 ("Weichai") [40% interest] and Hong Kong Peterson Company common shares per Fuel Systems share on (CNG) Equipment Ltd. ("Hong Kong Peterson") [25% closing of the Merger and through the exchange process. In interest] focusing on the Chinese market. WWI develops, the event that the Company's VWAP is greater than $1.64 manufactures, and sells advanced, alternative fuel engines and less than $2.37, then Fuel Systems stockholders would and parts that are widely used in city bus, coach, and receive a number of Company common shares per Fuel heavy-duty truck applications in China or exported to Systems share equal to dividing $5.05 by the Company’s other regions globally. VWAP, rounded to four decimal places. The measuring period will be the ten consecutive trading days ending on and including the trading day five business days prior to GENERAL the anticipated closing date. On March 18, 2016, the Company announced that its DEVELOPMENTS shareholders approved the issuance of such number of Subsequent to year end, the Company announced that it Company common shares as required to complete the has entered into an agreement with Cartesian Capital Merger. Group for up to $71.3 million in financing to support The Merger requires certain regulatory approvals and global growth initiatives. The financing agreement approval by a majority of the shareholders of Fuel Systems. immediately provides $17.5 million in non-dilutive capital All substantive regulatory approvals have been received. with additional capital contingent on reaching key The Merger is currently anticipated to close in April 2016. milestones and establishing new investment opportunities. This financing package includes a contingent payment (derived substantially from future HPDI product sales), a convertible debenture, non-core asset sales, and incremental funding capacity to support future product development. As part of the financing agreement, Peter Yu,

16 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS » SELECTED ANNUAL FINANCIAL INFORMATION

The following tables set forth a summary of the financial SELECTED ANNUAL results of our joint ventures for the years ended December 31, 2015, December 31, 2014 and the year ended December FINANCIAL 31, 2013: INFORMATION SELECTED CWI STATEMENTS OF OPERATIONS DATA The following table sets forth a summary of our financial Years ended Dec 31 results for the years ended December 31, 2015, December (expressed in millions of United States dollars) 2015 2014 2013 31, 2014 and the year ended December 31, 2013: Total revenue $ 331.9 $ 337.2 $ 310.7 Gross margin 103.8 66.4 64.2 SELECT CONSOLIDATED STATEMENTS OF OPERATIONS DATA GM % 31.3% 19.7% 20.7% (expressed in millions of USD, Years ended December 31 Net income before income taxes 50.5 21.0 23.1 except per share amounts and shares outstanding) 2015 2014 2013 Net income attributable to the Total revenue $ 103.3 $ 130.6 $ 164.0 Company 17.1 8.1 9.4 Gross margin[1] 20.0 32.7 15.3 GM % 19.4% 25.0% 9.3% SELECTED WWI STATEMENTS OF OPERATIONS DATA Net loss (98.4) (149.6) (185.4) Years ended Dec 31

Net loss per share (expressed in millions of United States dollars) 2015 2014 2013 —basic and diluted[2] (1.53) (2.37) (3.22) Total revenue $ 186.0 $ 618.5 $ 466.6 Weighted average shares outstanding 64,109,703 63,130,022 57,633,190 Gross margin 21.4 52.5 37.3 1. Gross margin is calculated as revenue less cost of product GM % 11.5% 8.5% 8.0% revenue. The Company’s gross margin may not be Net income before income taxes 3.8 20.3 14.5 comparable to those of other entities because some entities include depreciation and amortization related to products Net income attributable to the Company 1.0 6.0 4.3 sold in cost of sales. Gross margin as defined above applies to the discussion of gross margin throughout the MD&A. (For the years ended December 31, 2015, 2014, and 2013 depreciation and amortization is excluded from the calculation of gross margin). 2. Fully diluted loss per share is the same as basic loss per share as the effect of conversion of stock options, restricted share units and performance share units would be anti-dilutive.

The following table sets forth a summary of our financial position as at December 31, 2015 and December 31, 2014:

SELECTED BALANCE SHEET DATA

(expressed in millions of United States dollars) Dec 31, 2015 Dec 31, 2014 Cash and short-term investments $ 27.8 $ 94.0 Total assets 209.7 335.8 Long-term debt 62.5 76.7

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 17 MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

equivalent. The Company is pleased to report that it met RESULTS FROM several key milestones during the year with our OEM OPERATIONS partners. CWI revenue for the year ended December 31, 2015 REVENUE decreased $5.3 million, or 2% from $337.2 million to $331.9 million. CWI product revenue for the year ended 2015 / 2014 December 31, 2015 decreased $9.6 million, or 3%, to $274.0 million on sales of 9,940 units compared to $283.6 Total segments revenues, including 100% of CWI and million and 10,512 units for the year ended December 31, WWI revenue, decreased $465.1 million, or 43% from 2014, which was primarily attributed to the decline of the $1,086.3 million in 2014 to $621.2 million in 2015. price of oil and other macroeconomic conditions. CWI The following table summarizes revenues by segment for parts revenue for the year ended December 31, 2015 was the year ended December 31, 2015 compared to the year $57.8 million compared with $53.7 million for the year ended December 31, 2014: ended December 31, 2014 which was primarily attributed to the increase of natural gas engine population in service.

REVENUES (2015 / 2014) WWI revenue for the year ended December 31, 2015 Years ended Dec 31 Change (expressed in millions of U.S. decreased $432.5 million, or 70% , from $618.5 million to 2015 2014 $ % dollars) $186.0 million. WWI shipped 15,956 units in 2015 Westport Operations $ 100.1 $ 127.0 $ (26.9) (21)% compared with 51,006 units for the year ended December Corporate and Technology Investments 3.2 3.6 (0.4) (11)% 31, 2014. Westport’s WWI results are in-line with general CWI 331.9 337.2 (5.3) (2)% market conditions in China and in-line with diesel truck WWI 186.0 618.5 (432.5) (70)% sales. Truck demand remains subdued, as demonstrated by Total segment revenues $ 621.2 $ 1,086.3 $ (465.1) (43)% the decrease of recent monthly commercial vehicle sales in Less: Equity investees' revenues 517.9 955.7 (437.8) (46)% China year-over-year, according to China Association of Total consolidated Automotive Manufacturers ("CAAM"). revenues $ 103.3 $ 130.6 $ (27.3) (21)% 2014 / 2013 Westport Operations revenue for the year ended December 31, 2015 decreased $26.9 million, or 21% from Total segments revenues, including 100% of CWI and $127.0 million to $100.1 million. Westport Operations has WWI revenue, increased $145.0 million, or 15% from been impacted significantly by the decline in the price of $941.3 million in 2013 to $1,086.3 million in 2014. oil and the strengthening of the US dollar. Revenue from The following table summarizes total revenue by segment European operations for the year ended December 31, for the years ended December 31, 2014 compared to the 2015, including the Prins acquisition increased by €6.2 year ended December 31, 2013: million, while revenue from North American operations decreased by approximately $17.1 million. The decrease in REVENUES (2014 / 2013) revenue from North American operations was driven by Years ended Dec 31 Change decreases in Westport's Ford qualified vehicle modifier (expressed in millions of U.S. dollars) 2014 2013 $ % ("QVM") business, decreased sales of Westport iCE Westport Operations $ 127.0 $ 151.6 $ (24.6) (16)% PACK™, and a decrease in engineering service contracts. Corporate and A further decrease of approximately $12.0 million in Technology Investments 3.6 12.4 (8.8) (71)% revenue was driven by unfavourable impacts of foreign CWI 337.2 310.7 26.5 9 % WWI 618.5 466.6 151.9 33 % currency translation from the Euro to the US dollar Total segment revenues $ 1,086.3 $ 941.3 $ 145.0 15 % equivalent. Less: Equity investees' revenues 955.7 777.3 178.4 23 % Corporate and Technology Investments revenue for Total consolidated the year ended December 31, 2015 decreased $0.4 million, revenues $ 130.6 $ 164.0 $ (33.4) (20)% or 11% from $3.6 million to $3.2 million. The decrease is primarily driven by unfavourable impacts of foreign Westport Operations revenue for the year ended currency translation from the Canadian to the US dollar December 31, 2014 decreased $24.6 million, or 16% to

18 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

$127.0 million from $151.6 million for the year ended GROSS MARGIN (2015 / 2014) December 31, 2013. Revenue from European operations Year Year ended ended Change decreased $7.0 million driven by an unfavourable impact (expressed in millions Dec 31, % of Dec 31, % of 2015 Revenue 2014 Revenue $ % of foreign currency translation from the Euro to the US of U.S. dollars) Westport dollar equivalent and weaknesses in certain markets, Operations $ 16.7 16.7% $ 29.1 22.9% $ (12.4) (43)% Corporate and particularly Europe and Asia. Revenue from North Technology American operations decreased $18.1 million due to the Investments 3.3 100.0% 3.6 100.0% (0.3) (8)% discontinuation of the first generation Westport™ HPDI CWI 103.8 31.3% 66.4 19.7% 37.4 56 % WWI 21.4 11.5% 52.5 8.5% (31.1) (59)% system in December 2013, offset by increased shipments of Total segment Westport iCE PACK, and increased service revenue. gross margin $ 145.2 23.4% $ 151.6 14.0% $ (6.4) (4)% Less: Equity investees' Corporate and Technology Investments revenue for gross margin 125.2 24.2% 118.9 12.4% 6.3 5 % the year ended December 31, 2014 decreased $8.8 million, Total consolidated gross margin $ 20.0 19.4% $ 32.7 25.0% $ (12.7) (39)% or 71% from $12.4 million to $3.6 million. The decrease is driven by decreases in license fees earned from our Westport Operations gross margin decreased $12.4 development agreements. All costs associated with our million to $16.7 million, or 16.7% of revenue, for the year development agreements were recorded as research and ended December 31, 2015 compared to $29.1 million, or development expenses in the period incurred in the 22.9% of revenue for the year ended December 31, 2014. consolidated statement of operations. The decrease in gross margin percentage is due to CWI revenue for the year ended December 31, 2014 inventory obsolescence charges of $8.7 million in the increased $26.5 million, or 9% from $310.7 million to current year compared to $2.1 million in the prior year. $337.2 million. CWI product revenue for the year ended Adjusted gross margin would have been 24.0% of revenue December 31, 2014 increased $22.6 million, or 9%, to without the obsolescence, compared to 24.6% in the prior $283.6 million on sales of 10,512 units compared to $261.0 year. Gross margin also decreased due to lower revenue million and 10,314 units for the year ended December 31, and changes in product mix. 2013, which was primarily attributed to the launch of the CWI gross margin increased $37.4 million to $103.8 ISX12 G heavy duty truck engine in April of 2013 million, or 31.3% of revenue from $66.4 million or 19.7% contributing to the increased volumes in North America. of revenue. CWI product margin and product gross margin CWI parts revenue for the year ended December 31, 2014 percentage for the year ended December 31, 2015 were was $53.7 million compared with $49.6 million for the $84.2 million and 30.7%, respectively, compared to $52.2 year ended December 31, 2013 which was primarily million and 18.4%, respectively, for the year ended attributed to the increase of natural gas engine population December 31, 2014. This increase in CWI gross margin in service. percentage was due primarily to a favourable decrease of WWI revenue for the year ended December 31, 2014 $23.5 million in net warranty adjustments and net increased $151.9 million, or 33%, from $466.6 million to extended coverage claims compared to the year ended $618.5 million. WWI shipped 51,006 units in 2014 December 31, 2014. Reliability of the ISL G engine has compared with 38,138 units for the year ended December continued to improve as a result of hardware and 31, 2013. calibration changes. CWI parts gross margin percentage was 33.9% for the year ended December 31, 2015 compared to 26.5% for the year ended December 31, 2014. GROSS MARGIN The increase in parts gross margin is primarily due to a 2015 / 2014 change in product mix. WWI gross margin decreased $31.1 million to $21.4 Total segments gross margin, including 100% share of CWI million, from $52.5 million. The decrease in gross margin and WWI decreased $6.4 million, or 4% from $151.6 relates to a decrease in the number of engines sold. Gross million in 2014 to $145.2 million in 2015. margin as a percentage of revenue increased from 8.5% to The following table presents gross margin by segment for 11.5% as a result of changes in product mix and product the year ended December 31, 2015 compared to the year pricing. ended December 31, 2014:

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 19 MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

2014 / 2013 December 31, 2013. This increase in CWI gross margin percentage was due primarily to a decrease of $8.3 million Total segments gross margin, including 100% share of CWI in net warranty adjustments and net extended coverage and WWI increased $34.8 million, or 30% from $116.8 claims and mix of sales compared to the year ended million in 2013 to $151.6 million in 2014. December 31, 2013. Warranty adjustments and net extended coverage claims totaling $21.7 million were The following table presents gross margin by segment for recorded for the year ended December 31, 2014 which is a the year ended December 31, 2014 compared to year ended decrease of $15.1 million from prior year claims of $36.8 December 31, 2013: million. CWI parts gross margin percentage was 26.5% for the year ended December 31, 2014 compared to 43.5% for GROSS MARGIN (2014 / 2013) the year ended December 31, 2013, which was due to a Year Year ended ended Change change in product mix and pricing. (expressed in millions Dec 31, % of Dec 31, % of of U.S. dollars) 2014 Revenue 2013 Revenue $ % Westport WWI gross margin increased $15.2 million to $52.5 Operations $ 29.1 22.9% $ 3.0 2.0% $ 26.1 870 % million, or 8.5% of revenue from $37.3 million or 8.0% of Corporate and Technology revenue. The increase in gross margin percentage related Investments 3.6 100.0% 12.3 100.0% (8.7) (71)% primarily to a change product mix and product pricing. CWI 66.4 19.7% 64.2 20.7% 2.2 3 % WWI 52.5 8.5% 37.3 8.0% 15.2 41 % Total segment gross margin $ 151.6 14.0% $ 116.8 12.4% $ 34.8 30 % RESEARCH & DEVELOPMENT Less: Equity investees' EXPENSES gross margin 118.9 12.4% 101.5 13.1% 17.4 17 % Total consolidated gross margin $ 32.7 25.0% $ 15.3 9.3% $ 17.4 114 % 2015 / 2014

The following table presents details of research and Westport Operations gross margin increased $26.1 development (“R&D”) expense by segment for the year million to $29.1 million, or 22.9% of revenue, for the year ended December 31, 2015 compared to year ended ended December 31, 2014 compared to $3.0 million, or December 31, 2014: 2.0% of revenue for the year ended December 31, 2013. Gross margin from North American operations increased RESEARCH & DEVELOPMENT (2015 / 2014) $30.9 million as a result of the prior year including $26.3 Years ended Dec 31 Change million of warranty adjustments and inventory net (expressed in millions of U.S. dollars) 2015 2014 $ % realizable write downs related to the discontinuation of the Westport Operations $ 13.6 $ 21.3 $ (7.7) 36% first generation Westport™ HPDI system. Gross margin Corporate and Technology from European operations decreased $4.8 million as a Investments 39.2 55.3 (16.1) 29% result of changes in product mix and weaknesses in certain Total research and development $ 52.8 $ 76.6 $ (23.8) 31% markets including Europe and Asia. Westport Operations research and development Corporate and Technology Investments gross expenses decreased $7.7 million due to reduction in margin decreased $8.7 million from $12.3 million to $3.6 program expenses, decreased headcount, and favorable million. The decrease in gross margin is driven by a impacts of foreign currency translation from the Euro and reduction in revenue. The gross margin percentage was the Canadian to the US dollar equivalent. 100% in both periods as Corporate and Technology Investments gross margin relates entirely to service Corporate and Technology Investments research revenue and revenue earned under our development and development expenses decreased $16.1 million from agreements and other fee payments. $55.3 million to $39.2 million due to reduction in program expenses and prioritizing of investment programs, CWI gross margin increased $2.2 million to $66.4 million, decreased headcount and favorable impacts of foreign or 19.7% of revenue from $64.2 million or 20.7% of currency translation from the Canadian to the US dollar revenue. CWI product margin and product gross margin equivalent. percentage for the year ended December 31, 2014 were $52.2 million and 18.4%, respectively, compared to $42.7 million and 16.4%, respectively, for the year ended

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2014 / 2013 Within 2015 SG&A are one time costs of $4.5 million related to the proposed merger between the Company and The following table presents details of R&D expense by Fuel Systems. Without these merger costs, SG&A would segment for the year ended December 31, 2014 compared have decreased 15.3% year over year. to year ended December 31, 2013: 2014 / 2013 RESEARCH & DEVELOPMENT (2014 / 2013) Years ended Dec 31 Change The following table presents details of SG&A expense by

(expressed in millions of U.S. dollars) 2014 2013 $ % segment for the year ended December 31, 2014 compared Westport Operations $ 21.3 $ 23.0 $ (1.7) (7)% to the year ended December 31, 2013: Corporate and Technology Investments 55.3 68.1 (12.8) (19)% SELLING, GENERAL & ADMINISTRATIVE (2014 / 2013) Total research and development $ 76.6 $ 91.1 $ (14.5) (16)% Years ended Dec 31 Change (expressed in millions of U.S. dollars) 2014 2013 $ % Westport Operations research and development Westport Operations $ 30.5 $ 47.5 $ (17) (36)% expenses decreased $1.7 million primarily due to lower Corporate and Technology Investments 35.3 27.7 7.6 27 % R&D expenses spent on Westport WiNG Systems as Total selling, general and product development was completed in 2013. administrative $ 65.8 $ 75.2 $ (9.4) (13)%

Corporate and Technology Investments research Westport Operations SG&A expenses decreased $17.0 and development expenses decreased $12.8 million from million primarily due to decreased headcount from $68.1 million to $55.3 million primarily driven by consolidating our facilities, discontinuation of activity reduction in program expenses and prioritizing of related to the first generation WestportTM HPDI system investment programs. and decreased scope of off-road programs.

Corporate and Technology Investments SG&A SELLING, GENERAL & expenses increased $7.6 million due to increase in ADMINISTRATIVE EXPENSES headcount to support new programs and global market development initiatives and severance recorded during the 2015 / 2014 year.

The following table presents details of Selling, General and Administrative (“SG&A”) expense by segment for the year FOREIGN EXCHANGE GAINS ended December 31, 2015 compared to the year ended & LOSSES December 31, 2014: Foreign exchange gains and losses reflected net realized SELLING, GENERAL & ADMINISTRATIVE (2015 / 2014) gains and losses on foreign currency transactions and the Years ended Dec 31 Change net unrealized gains and losses on our net U.S. dollar

(expressed in millions of U.S. dollars) 2015 2014 $ % denominated monetary assets and liabilities in our Westport Operations $ 18.3 $ 30.5 $ (12.2) (40)% Canadian operations that were mainly composed of cash Corporate and Technology and cash equivalents, short-term investments, accounts Investments 34.4 35.3 (0.9) (3)% receivable and accounts payable. In addition, the Company Total selling, general and administrative $ 52.7 $ 65.8 $ (13.1) (20)% has foreign exchange exposure on Euro denominated monetary assets and liabilities where the functional Westport Operations SG&A expenses decreased $12.2 currency of the subsidiary is not the Euro. For the year million due to decreased headcount and favorable impacts ended December 31, 2015, we recognized a net foreign of foreign currency translation from the Euro and the exchange gain of $11.6 million with the decline in the Canadian to the US dollar equivalent. Canadian dollar relative to the U.S. dollar. A majority of the foreign exchange gain for the year ended December 31, Corporate and Technology Investments SG&A 2015 is unrealized. expenses decreased $0.9 million due to decreased headcount and favorable impacts of foreign currency For the year ended December 31, 2014, we recognized a net translation from the Canadian to the US dollar equivalent. foreign exchange gain of $3.4 million with the movement

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 21 MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

in the Canadian dollar relative to the U.S. dollar. This period amounts. The Company does not believe the compares to a net foreign exchange gain of $15.2 million adjustment is material to the year ended December 31, for the year ended December 31, 2013. 2015 consolidated financial statements. DEPRECIATION & INTEREST ON LONG-TERM DEBT AMORTIZATION & AMORTIZATION OF

Depreciation and amortization for the year ended DISCOUNT EXPENSE December 31, 2015 was $13.7 million compared to $18.7 Interest on long-term debt and amortization of discount million for the year ended December 31, 2014 and $16.3 expense primarily relates to our interest expense on million for the year ended December 31, 2013. The Canadian dollar and Euro denominated debentures. decrease primarily related to depreciation of property and

equipment purchases, which decreased due to favourable INTEREST ON LONG-TERM DEBT & AMORTIZATION OF DISCOUNT EXPENSE impacts of foreign currency translation from the Euro and Years ended Dec 31

the Canadian to the US dollar equivalent. (expressed in millions of U.S. dollars) 2015 2014 2013 Canadian debentures – 9% per annum $ 3.9 $ 3.7 $ 3.1 INCOME FROM INVESTMENT Senior financing facilities 0.9 1.6 1.0 ACCOUNTED FOR BY THE Amortization of discount and non- cash interest expense 0.7 0.5 0.7 EQUITY METHOD Total Interest on long-term debt $ 5.5 $ 5.8 $ 4.8

Income from investments accounted for by the equity Interest on long-term debt for the year ended December method primarily relates to our 50% interest in CWI and 31, 2015 of $5.5 million is lower compared to the year our 35% interest in WWI and our increase in equity ended December 31, 2014 due to favorable impacts of income results primarily from higher revenues and gross foreign currency translation from the Euro and the margins for CWI and WWI in the current year compared to Canadian to the US dollar equivalent. the prior year. Interest on long-term debt for the year ended December INCOME FROM INVESTMENT ACCOUNTED FOR BY THE EQUITY METHOD 31, 2014 of $5.8 million is higher compared to the year Years ended Dec 31 ended December 31, 2013 due to additional interest on (expressed in millions of U.S. dollars) 2015 2014 2013 senior financing facilities as a result of increased CWI – 50% interest $ 17.1 $ 8.1 $ 9.4 borrowings. WWI – 35% interest 1.0 6.0 4.3 Other 0.2 0.1 (0.3) Income from investment accounted INCOME TAX EXPENSE for by the equity method $ 18.3 $ 14.2 $ 13.4 Income tax expense for the year ended December 31, 2015 During the first quarter of 2015, the Company identified was $0.7 million compared to an income tax recovery of adjustments in CWI's estimated 2014 financial statement $0.6 million for the year ended December 31, 2014 and an results, which primarily related to warranty accrual. The income tax expense of $0.9 million for year ended identified adjustments resulted in a cumulative $1.2 December 31, 2013. million understatement of the Company’s income from The increase for the year ended December 31, 2015 investments accounted for by the equity method for the primarily relates to higher distributable earnings from our year ended December 31, 2014. The Company corrected investment in CWI. The decrease in income tax expense for the amounts related to CWI in the first quarter of 2015, the year ended December 31, 2014 compared to the year which had the net effect of increasing income from ended December 31, 2013 primarily relates to lower investments accounted for by the equity method by $1.2 distributable earnings from our investment in CWI and a million for the year ended December 31, 2015. The recovery of the deferred income tax liability relating to the Company did not believe this adjustment was material to intangible and goodwill impairment charges. its consolidated financial statements for the year ended December 31, 2014 and, therefore, did not restate any prior

22 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS » CAPITAL REQUIREMENTS, RESOURCES & LIQUIDITY

be successful in obtaining third party funding on CAPITAL acceptable terms or at all. REQUIREMENTS, CASH FLOW FROM RESOURCES & OPERATING ACTIVITIES

LIQUIDITY We prepare our statement of cash flows using the indirect As at December 31, 2015, our cash, cash equivalents and method. Under this method, we reconcile net loss to cash short-term investment position was $27.8 million, a flows from operating activities by adjusting net loss for decrease of $66.2 million from $94.0 million at December those items that impact net loss but may not result in 31, 2014. Cash and cash equivalents consist of guaranteed actual cash receipts or payments during the period. These investment certificates, term deposits and bankers reconciling items include but are not limited to acceptances with maturities of 90 days or less when depreciation and amortization, stock-based compensation acquired. Short-term investments consist of investment expense, unrealized foreign exchange gain, income from grade bankers’ acceptances, term deposits and commercial investments accounted for by the equity method, paper. We invest primarily in short-term paper issued by provisions for inventory reserves and doubtful accounts, Schedule 1 Canadian banks, R1 high rated corporations and changes in the consolidated balance sheet for working and governments. capital from the beginning to the end of the period. The Company has sustained net losses since inception and 2015 compared to 2014 as at December 31, 2015 has an accumulated deficit of $863.3 million. As at December 31, 2015 the Company has In 2015, our net cash flow used in operating activities was cash and cash equivalents and short-term investments of $69.1 million, a decrease of $37.7 million from the net cash $27.8 million. The Company’s ability to continue as a flow used in operating activities in the year ended going concern is dependent on its available cash, its ability December 31, 2014. This change was primarily driven by a to find new sources of financing or raise cash through the reduction in program expenses, decreased headcount, and sale of assets while in pursuit of operating profitability. favorable impacts of foreign currency translation from the There can be no assurance that the Company will be Euro and the Canadian to the US dollar equivalent. Cash successful in achieving its objectives. Management used in operations decreased by $4.3 million compared to believes that the cash balances available as of the prior year. These changes include increases in positive December 31, 2015, combined with cost cutting measures operating cash flow associated with accounts payables in place and its ability to find new sources of financing or (primarily in relation with timing of payments), offset by raise cash through the sale of assets subsequent to the an increase in accounts receivables (primarily as a result of balance sheet date, provides sufficient funds for the increased sales in Q4 2015 versus Q4 2014). Company to meet its obligations beyond the next 12 months. The accompanying financial statements do not CASH FLOW FROM INVESTING include any adjustments that might be necessary if the ACTIVITIES Company is unable to continue as a going concern. See also "Cartesian Financing" in the subsequent events of the Our net cash used in investing activities consisted General Developments section of this MD&A for cash primarily of dividends received from joint ventures, offset raised subsequent to year end. by purchases of property, plant and equipment property (“PP&E”). Our plan is to use our current cash, cash equivalents and short-term investments, our share of CWI dividends 2015 compared to 2014 (typically declared and paid quarterly) and borrowings under our credit facility to fund our committed milestones In 2015, our net cash flow received from investing and obligations for our current programs. We will also activities was $16.4 million, a decrease of $4.9 million. continue to seek third party and government funding on Dividends received from joint ventures increased by $17.3 commercially acceptable terms to offset costs of our million to $20.5 million, primarily as a result of stronger investments; however, there are no guarantees that we will net income attributable to CWI. CWI improved the

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 23 MANAGEMENT'S DISCUSSION AND ANALYSIS » CAPITAL REQUIREMENTS, RESOURCES & LIQUIDITY

reliability of the ISL G engine, which resulted in a This “Capital Requirements, Resources and Liquidity” favourable decrease of $23.5 million in net warranty section contains certain forward looking statements. By adjustments and net extended coverage claims compared their nature, forward-looking statements require us to to the year ended December 31, 2014. PP&E additions make assumptions and are subject to inherent risks and decreased by $5.4 million to $4.8 million primarily as a uncertainties. Readers are encouraged to read the result of prioritizing investments and capital asset projects. “Forward Looking Statements” and “Basis of Presentation” Net cash flow received from investing activities decreased sections of this MD&A, which discusses forward-looking because no short-term investments matured in 2015, statements and the “Business Risks and Uncertainties” compared to $31.4 million in 2014. section of this MD&A and of our AIF. CASH FLOW FROM FINANCING ACTIVITIES CONTRACTUAL 2015 compared to 2014 OBLIGATIONS & In 2015, our net cash flow from financing activities was COMMITMENTS negative because our repayment of operating lines of credit and long term facilities was greater than our infusion of CONTRACTUAL OBLIGATIONS & COMMITMENTS cash from drawing on operating lines of credit. In 2014, Years Carrying Contractual our net cash flow from financing activities was positive, amount cash flows < 1 1–3 4–5 5+ primarily as a result of raising an extra $17.8 million in Accounts payable and accrued liabilities $ 57.5 $ 57.5 $ 57.5 $ — $ — $ — unsecured subordinated debentures. Unsecured subordinated debentures (1) 38.4 46.0 3.6 42.4 — — Westport’s capital requirements will vary depending on a Senior financing (2) 9.1 9.4 6.3 1.8 0.7 0.7 number of factors, including the timing and size of orders Senior revolving (3) for our LNG systems, our ability to successfully launch financing 10.9 11.4 0.3 11.1 — — Other bank financing (4) 3.2 3.6 2.0 0.2 0.1 1.3 products on time, our supply chain and manufacturing Capital lease requirements, our success in executing our business plan, obligations 0.8 0.8 0.4 0.4 — — Operating lease relationships with current and potential strategic partners, commitments — 56.5 3.3 8.0 9.4 35.8 commercial sales and margins, product reliability, progress Royalty payments (5) — 14.5 1.2 2.1 1.9 9.1 on research and development activities, capital $ 119.9 $ 199.7 $ 74.6 $ 66.0 $ 12.1 $ 46.9 expenditures and working capital requirements. We also 1. Includes interest at 9%. continue to review investment and acquisition 2. Includes interest at rates disclosed in note 13(b) of the annual opportunities on a regular basis for technologies, financial statements in effect at at December 31, 2015. 3. Includes interest at rates disclosed in note 13(c) of the annual businesses and markets that would complement our own financial statements in effect at December 31, 2015. products or assist us in our commercialization plans. 4. Includes interest at rates disclosed in note 13(d) in effect at Significant new orders, expanded engine programs, December 31, 2015. acquisitions or investments could require additional 5. The Company is obligated to pay annual royalties equal to the greater of CDN $1.4 million or 0.33% of the Company's funding. If such additional funding is not available to us, if gross annual revenue from all sources, including CWI, provided expected orders do not materialize or are delayed, or if we that gross revenue exceeds CDN $13.5 million in any aforementioned fiscal year, until a total of CDN $28.2 million have significant overspending in our programs, we may be has been paid. The Company has assumed the minimum required to delay, reduce or eliminate certain research and required payments. development activities, reduce or cancel inventory orders, and possibly forego new program, acquisition or CAPITAL LEASE OBLIGATIONS investment opportunities. Any of those circumstances could potentially result in a delay of the commercialization & OPERATING LEASE of our products in development and could have an adverse COMMITMENTS effect on our business, results of operations, liquidity and Capital lease obligations related primarily to office financial condition. equipment and machinery, have initial terms of three to five years and have interest rates ranging from 3.1% to

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4.9%. Operating lease commitments represent our future SENIOR REVOLVING FINANCING minimum lease payments under leases related primarily to Subordinated Senior financing Prins Senior Senior debenture Mortgage revolving our operating premises and office equipment. notes Emer Prins Loan financing Total 2016 $ — $ 3.8 $ 1.9 $ 0.3 $ — $ 6.0 SENIOR FINANCING 2017 38.3 1.0 0.1 0.3 10.9 50.6 2018 — — — 0.3 — 0.3 Senior financing consists of three arrangements with a 2019 — — — 0.4 — 0.4 combined $15.9 million in principal outstanding. 2020+ — — — 1.0 — 1.0 $ 38.3 $ 4.8 $ 2.0 $ 2.3 $ 10.9 $ 58.3 The Emer S.p.A ("Emer") senior financing agreement with outstanding principal of $9.4 million is denominated in EUROS and bears interest at the 6-month Euribor SUBORDINATED DEBENTURE plus 2.5% (2.6% as at December 31, 2015) and is recorded NOTES at amortized cost using the effective interest rate method. Interest is paid semi-annually. The Company has pledged On September 23, 2011, the Company raised CDN$36.0 its interest in Emer as a general guarantee for its senior million through the issuance of debentures (the "Initial financing. The senior financing matures in 2017. Debentures"). The Initial Debentures were unsecured and subordinated to senior indebtedness, matured on The outstanding principal for the Prins senior financing as September 22, 2014, and bore interest at 9% per annum, of December 31, 2015 is $2.0 million. The senior financing were payable in cash semi-annually in arrears on March 15 agreement is denominated in EUROS and bears interest at and September 15 of each year during the term, which the 3-month Euribor plus 3.5% (3.6% as at December 31, commenced on March 15, 2012. 2015). Interest is paid quarterly. The Company has pledged its interest in Prins as a general guarantee for its On June 27, 2014, the Company raised CDN$19.0 million senior financing. The senior financing matures in 2016. through the issuance of debentures on a private placement basis (the “Additional Debentures”). In conjunction The Prins senior mortgage loan was assumed on the with the issuance of the Additional Debentures, the acquisition of Prins. The senior mortgage loan is Company amended the terms of the Initial Debentures (the denominated in EUROS and bears interest at 3-month “Amended Initial Debentures”). The Amended Initial Euribor plus 1% (1.1% as at December 31, 2015). Interest is Debentures are ranked pari passu with the Additional paid quarterly. The Company has pledged its interest in Debentures and both shall be treated as the same series of Prins's building as a general guarantee for its senior debentures (the “New Debentures”) with the same mortgage loan. The senior mortgage loan matures in terms. The New Debentures totaling CDN$55.0 million 2020. are composed of the Additional Debentures CDN$19.0 The three senior financing agreements will be repaid in million and the Amended Initial Debentures CDN$36.0 accordance with [note 13(b)] of the annual financial million. The New Debentures are unsecured and statements. subordinated to senior indebtedness, mature on September 15, 2017, and bear interest at 9% per annum, payable in cash semi-annually in arrears on March 15 and SENIOR REVOLVING September 15 of each year during the term. FINANCING The New Debentures contain an extension option that will The senior revolving financing facility is denominated in allow each debenture holder to have the option to extend, a EUROS and bears interest at the 6-month Euribor maximum of six times, the maturity date for an additional plus 2.6% (2.7% as at December 31, 2015) and will be period of six months provided that greater than CDN repaid through one principal payment of €10 million on $10,000 of the aggregate principal amount of the New March 31, 2017. Interest is paid semi-annually. The Debentures remain outstanding. Company has pledged its interest in Emer as a general guarantee for its senior revolving financing. The Company has performed the assessment of embedded derivatives within the New Debentures and concluded that The principal repayment schedule of the senior financings there is an embedded derivative that requires bifurcation are as follows for the years ended December 31: related to the extension option from the New Debentures.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 25 MANAGEMENT'S DISCUSSION AND ANALYSIS » CONTRACTUAL OBLIGATIONS & COMMITMENTS

The extension option was deemed not clearly and closely times and help ensure adequate component supply, the related to the New Debentures and is separately accounted Company enters into agreements with suppliers and for as a standalone derivative. The Company recorded this contract manufacturers. A portion of our reported embedded derivative as a non-current liability on its estimated purchase commitments arising from these consolidated balance sheet. At issuance on June 27, 2014, agreements are firm, noncancelable, and unconditional the embedded derivative’s fair value was determined to be commitments. The Company may be subject to penalties, CDN$1.3 million, which was recorded as a reduction to the and may lose important suppliers, if it is unable to meet its carrying value of the New Debentures. The Company is purchase commitments. In 2014, the Company entered accreting the carrying value of the debt to interest expense into several long-term fixed price contracts to purchase by using the effective interest method through to the parts to produce certain products. These contracts maturity date of the New Debentures. The embedded represent firm purchase commitments which are evaluated derivative is subsequently adjusted to fair value at each for potential market value losses. The Company estimated reporting date, with the associated fair value loss (gain) a loss on these firm purchase commitments with reference recorded in interest and other income (loss). The to the estimated future sales price of these products and derivative liability is included in other long term liabilities recognized a provision for inventory purchase on the consolidated balance sheets. The Company commitments of $4.1 million in 2014. The provision is determined the fair value of the embedded derivative using recognized in other payables in accounts payable and the Interest Rate Option Pricing Method which accrued liabilities. During 2015 the provision has been incorporated the Black-Karasinski model. drawn down to $2.1 million.

The table below discloses the accounting values assigned to the subordinated debenture notes. All values are disclosed in CDN ("C$"). The approximate exchange rate used to CONTINGENT OFF- value the subordinated debenture notes to USD at December 31, 2015 was 0.72 (2014 – 0.86). BALANCE SHEET

SUBORDINATED DEBENTURE NOTES ARRANGEMENTS Dec 31 (All values in Canadian dollars) 2015 2014 GOVERNMENT FUNDING Balance, beginning of period C$ 52.0 C$ 34.0 Issuance of Additional Debentures — 19.0 We are continually exploring strategic opportunities to Extension Option Discount — (1.2) work with governments to provide them with alternative Accretion for extension option 0.4 0.2 fuel solutions. As a result of our government partnerships, Accretion of share issuance costs 0.7 — we recognized $0.2 million in government funding during Balance, end of period C$ 53.1 C$ 52.0 the year ended December 31, 2015 compared with $0.9 1. We adopted ASU 2015-03 in the fourth quarter of 2015. We million for the year ended December 31, 2014 and $0.6 applied the change retrospectively to Jan. 1, 2014 for prior million for the year ended December 31, 2013. period balances of unamortized debt issuance costs, resulting in a CDN $2.0 million reduction in other assets and long-term debt on our consolidated balance sheet as of Dec. 31, 2014. Under certain repayment terms, we are obligated to repay royalties as follows: ROYALTY PAYMENTS Industrial Technologies Office Royalty payments include annual royalties payable to (formerly Technology Partnerships Canada) Industry Canada’s Industrial Technologies Office (“ITO”) DESCRIPTION: Fund 30% of the eligible costs of, as outlined in “Government Funding” below. among other research projects, the adaptation of Westport’s technology to diesel engines, up to CDN PURCHASE COMMITMENTS $18.9 million.

The Company purchases components from a variety of ROYALTIES: Annual royalties equal to the greater of suppliers and contract manufacturers. During the normal CDN $1.35 million or 0.33% of annual gross revenues course of business, in order to manage manufacturing lead

26 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS » CONTINGENT OFF-BALANCE SHEET ARRANGEMENTS

from all sources, provided that gross revenues exceed CDN $13.5 million. CRITICAL

TERM: Fiscal 2010 to fiscal 2015, inclusive; royalty ACCOUNTING period may be extended until the earlier of March 31, 2018 or until cumulative royalties total CDN $28.2 POLICIES & ESTIMATES million. Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make For the year ended December 31, 2015, royalties of $0.3 estimates and assumptions that affect the amounts million relating to ITO were paid. $2.4 million remain reported in our consolidated financial statements. We have accrued at December 31, 2016. Cumulative royalties paid identified several policies as critical to our business to date relating to ITO at December 31, 2015 total CDN operations and in understanding our results of operations. $10.0 million. These policies, which require the use of judgment, estimates and assumptions in determining their reported amounts, include our accounting of CWI as variable SHARES OUTSTANDING interest entity, warranty liability, revenue recognition, inventories, property, equipment, furniture and leasehold For the years ended December 31, 2015, December 31, improvements, stock-based compensation, goodwill and 2014 and the year ended December 31, 2013, the weighted intangible assets. The application of these and other average number of shares used in calculating the loss per accounting policies are described in Note 2 of our calendar share was 64,109,703, 63,130,022 and 57,633,190, year 2015 annual consolidated financial statements. Actual respectively. During the year ended December 31, 2015, amounts may vary significantly from estimates used. we granted 5,556,630 RSUs and PSUs (together the “Share Units”). The Common Shares, share options and Share Units outstanding and exercisable as at the following VARIABLE INTEREST ENTITIES dates are shown below: A variable interest entity (“VIE”) is any type of legal structure not controlled by voting equity but rather by SHARES OUTSTANDING contractual and/or other financial arrangements. Interests (weighted average exercise Dec 31, 2015 Mar 29, 2016 prices ("WAEP") are presented in in VIEs are consolidated by the company that is the Canadian dollars) Shares / units WAEP Shares / units WAEP primary beneficiary. The Company’s interest in CWI is a Common Shares outstanding 64,380,819 64,487,305 VIE but it is determined that there is no primary beneficiary. Share Units Outstanding (1)(2) 9,657,921 N/A 9,118,870 N/A Exercisable 1,150,294 N/A 1,379,694 N/A WARRANTY LIABILITY

1. As at December 31, 2015, excludes 41,302 (March 29, 2016 - Estimated warranty costs are recognized at the time we sell 35,315) of phantom share units, respectively, which when vested, are exercisable in exchange for a cash payment and our products and included in cost of revenue. We use do not result in the issuance of common shares. historical failure rates and costs to repair product defects 2. As at December 31, 2015, includes 3,561,433 (March 29, 2016 - during the warranty period, together with information on 3,140,200) PSUs with payout levels ranging between 0% and 200% upon achieving the required performance criteria over known products to estimate the warranty liability. The the measurement period. None of these PSUs are currently ultimate amount payable and the timing will depend on known to be issuable based on the prior achievement of the required 200% conversion ratio as at the date hereof, however actual failure rates and the actual cost to repair. We review such awards have not yet become vested. our warranty provision quarterly and record adjustments to our assumptions based on the latest information available at that time. Since a number of our products are new in the market, historical data may not necessarily reflect actual costs to be incurred, and this exposes the Company to potentially significant fluctuations in liabilities and our statement of operations. New product launches require a greater use of judgment in developing

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estimates until claims experience becomes available. our achieving defined milestones or on the performance of Product specific experience is typically available four or work under product development programs. Revenues are five quarters after product launch, with a clear experience recognized using the milestone method based on trend not evident until eight to twelve quarters after assessment of progress achieved against the defined launch. We generally record warranty expense for new milestones. Revenue may also be recognized using the products upon shipment using a factor based upon proportionate performance method of accounting based on historical experience from previous engine generations in the performance of work under the research and the first year, a blend of actual product and historical development arrangement. All costs incurred related to experience in the second year and product specific revenue earned from research and development experience thereafter. Adjustments to and estimated future arrangements are recorded as research and development direct warranty costs are accrued and charged to cost of expense as incurred. revenue in the period when the related revenues are recognized while indirect warranty overhead salaries and Revenue from Contracts related costs are charged to cost of revenue in the period The Company earns revenue under certain contracts to incurred. provide engineering development services. These During the fourth quarter of 2013, a study of the historical contracts provide for the payment for services based on the data indicated that the cost to repair product defects performance of work under product development continued to increase significantly primarily associated programs. Revenues are recognized under these contracts with our extended warranty contracts. As a result, the based on the percentage of completion method of Company recognized a change in estimate in our base accounting. The components to measure percentage of warranty liability and a loss on our extended warranty completion may include estimated costs to complete a contracts representing the excess of the estimated cost to contract, estimated hours to completion or management’s service these contracts over the amount of the deferred assessment of work to be performed. When estimates of revenue recognized associated with the contracts. The total costs to be incurred on a contract exceed total warranty liability was reviewed in the fourth quarter of estimates of revenue to be earned, a provision for the 2014 and 2015, and no change in estimate was required. entire loss on the contract is recorded in the period the loss is determined. Changes to the estimated percentage of REVENUE RECOGNITION completion of a contract may result in an adjustment to previously recognized revenues. All costs incurred related Product Revenue to revenue earned from contracts are recorded in cost of products sold. The Company’s primary source of revenue is from the sale of kits, Westport LNG systems and parts, and Westport Arrangements with customers may include multiple CNG and LPG fuel systems for OEMs in the light-duty deliverables, including any combination of products, automotive and industrial markets. Product revenue is services, and licenses. In these arrangements, the recognized when contractual terms are agreed upon, the Company allocates revenue to all deliverables based on price is fixed or determinable, the products are shipped their relative selling prices. The Company uses a hierarchy and title passes to the customer and collectability is to determine the selling price to be used for allocating reasonably assured. revenue to deliverables: a. vendor-specific objective evidence of fair value Revenue from Research & ("VSOE"), Development b. third-party evidence of selling price ("TPE"), and The Company also earns service revenue from research c. best estimate of selling price ("BESP"), which are and development arrangements under which the Company determined as follows: provides contract services relating to developing natural gas engines or biogas engines for use in products and VSOE providing ongoing development services to assist with the In limited circumstances are products sold separately in development and commercialization of products. These stand-alone arrangements. In determining VSOE, the contracts provide for the payment for services based on Company requires that a substantial majority of the selling

28 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS » CRITICAL ACCOUNTING POLICIES & ESTIMATES prices for a product or service falls within a reasonably License Revenue narrow pricing range, generally evidenced by the pricing rates of approximately 85% of such historical stand-alone Revenue from technology license fees is recognized over transactions falling within plus or minus 10% of the the duration of the licensing agreement. Amounts received median rate. In addition, the Company considers the in advance of the revenue recognition criteria being met geographies in which the products or services are sold, are recorded as deferred revenue. major product and service groups, customer classification, and other environmental or marketing variables in INVENTORIES determining VSOE. The Company’s inventories consist of the Company’s fuel TPE system products (finished goods), work-in-progress, purchased parts and assembled parts. Inventories are VSOE exists only when the Company sells the deliverable recorded at the lower of cost and net realizable value. Cost separately. When VSOE does not exist, the Company is determined based on the lower of weighted average cost attempts to determine TPE based on competitor prices for and net realizable value. The cost of fuel system product similar deliverables when sold separately. Generally, the inventories, assembled parts and work-in-progress Company’s go-to-market strategy for many of its products includes materials, labour and production overhead differs from that of its peers and its offerings contain a including depreciation. The Company provides inventory significant level of customization and differentiation such write-downs based on excess and obsolete inventories that the comparable pricing of products with similar determined primarily by future demand forecasts. In functionality sold by other companies cannot be obtained. addition, the Company records a liability for firm, Furthermore, the Company is unable to reliably determine noncancelable, and unconditional purchase commitments what similar competitor products’ selling prices are on a with manufacturers for quantities in excess of the stand-alone basis. Therefore, the Company is typically not Company’s future demand forecast consistent with its able to determine TPE. valuation of excess and obsolete inventory. BESP The objective of BESP is to determine the price at which PROPERTY, PLANT & the Company would transact a sale if the product or service EQUIPMENT & INTANGIBLE were sold on a stand-alone basis. When both VSOE and ASSETS TPE do not exist, the Company determines BESP by first collecting all reasonably available data points including We consider whether or not there has been an impairment sales, cost and margin analysis of the product, and other in our long-lived assets, such as equipment, furniture and inputs based on the Company’s normal pricing practices. leasehold improvements and intangible assets, whenever Second, the Company makes any reasonably required events or changes in circumstances indicate that the adjustments to the data based on market and Company- carrying value of the assets may not be recoverable. If such specific factors. Third, the Company stratifies the data assets are not recoverable, we are required to write down points, when appropriate, based on customer, magnitude the assets to fair value. When quoted market values are not of the transaction and sales volume. available, we use the expected future cash flows discounted at a rate commensurate with the risks associated with the Once elements of an arrangement are separated into more recovery of the asset as an estimate of fair value to than one unit of accounting, revenue is recognized for each determine whether or not a write down is required. separate unit of accounting based on the nature of the revenue as described above. Intangible Assets

Changes in cost estimates and the fair values of certain Based on the revenue and operating results and decline in deliverables could negatively impact the Company’s the oil price, the Company concluded there were operating results. In addition, unforeseen conditions could impairment indicators requiring the performance of a arise over the contract term that may have a significant long-lived assets impairment test for customer contracts, impact on the Company’s operating results. technology and other intangibles as of November 30, 2014. Accordingly non-cash impairment charges aggregating to

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$5.8 million were recorded during the year ended it is earned, which generally is the period over which the December 31, 2014 which reduced the carrying values of units vest. technology by $0.1 million, customer contracts by $4.7 million and other intangibles by $1.0 million for the GOODWILL Westport Operations segment. We do not amortize goodwill but instead test it annually Based on the revenue and operating results and decline in for impairment, or more frequently when events or the oil price, the Company concluded there were changes in circumstances indicate that goodwill might be impairment indicators requiring the performance of a impaired. This impairment test is performed annually at long-lived assets impairment test for customer contracts, November 30. We use a two-step test to identify the technology and other intangibles as of November 30, 2015. potential impairment and to measure the amount of The Company completed its annual assessment at impairment, if any. The first step is to compare the fair November 30, 2015 and concluded that intangible assets value of the reporting unit with its carrying amount, were not impaired. including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered Impairment of Property, Plant & impaired; otherwise, goodwill is impaired and the loss is Equipment measured by performing step two. Under step two, the During the year ended December 31, 2015, the Company impairment loss is measured by comparing the implied fair recorded an impairment charge of $4.0 million. The value of the reporting unit goodwill with the carrying impairment resulted primarily from the write-down of amount of goodwill.

Orca LNG trailers ("Orcas") which provide in-yard fleets We determine fair value using widely accepted valuation convenient refueling in the absence of a permanent techniques, including discounted cash flows and market liquefied natural gas ("LNG") solution. The method used multiple analyses. These types of analyses contain to determine fair value was recent sales of Orcas and the uncertainties because they require management to make impairment charge was recorded in the Westport assumptions and to apply judgment to estimate industry Operations segment. economic factors and the profitability of future business During the year ended December 31, 2014, the Company strategies. recorded an impairment charge of $5.2 million. The The Company's annual assessment date is November 30. impairment was primarily recorded against non-utilized However, based on the revenue and operating results of test cells, and non-utilized equipment related to facility the Italian reporting unit, which is within the Westport closures. Operations segment in the nine months ended September 30, 2015, the decline in the outlook for the remainder of STOCK-BASED 2015 and future years and the decline in the Company's COMPENSATION share price, the Company concluded there were impairment indicators requiring an interim goodwill We account for stock-based compensation related to stock impairment assessment as of September 30, 2015. Based options, Performance Share Units (“PSUs”) and on the Company's assessment, it was determined that the Restricted Share Units (“RSUs”) granted to employees carrying amount of goodwill exceeded the implied fair and directors using the fair value method. The resulting value of goodwill and as a result an impairment of $18.7 compensation expense for stock options is calculated using million was recorded in the Italian reporting unit. the Black-Scholes valuation method net of estimated forfeitures and is recognized in results from operations The remaining goodwill of $3.0 relates to the Netherlands over the period in which the related employee services are reporting unit, which is within the Westport Operations' rendered. We account for performance shares by segment. The Company completed its annual assessment calculating the fair value using a Monte-Carlo simulation at November 30, 2015 and concluded that the goodwill was and RSUs by calculating the fair value based on the market not impaired. price of the Company’s common shares on the date of An assessment of the carrying value of goodwill was grant. The compensation expense is recorded in the period previously conducted as of November 30, 2014. Based on the Company's assessment, it was determined that

30 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS » CRITICAL ACCOUNTING POLICIES & ESTIMATES carrying amount of goodwill exceeded the implied fair combination account for measurement period adjustments value of goodwill and as a result an impairment of $18.5 retrospectively with a requirement that an acquirer million was recorded in the US reporting unit, which is recognize adjustments to the provisional amounts that are within the Westport Operations segment for the year identified during the measurement period in the reporting ended December 31, 2014. period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same For 2014 and 2015, the fair value of the reporting units was period’s financial statements, the effect on earnings of determined using the present value of expected future cash changes in depreciation, amortization, or other income flows discounted at a rate equivalent to a market effects, if any, as a result of the change to the provisional participant’s weighted-average cost of capital. The amounts, calculated as if the accounting had been estimates and assumptions regarding expected future cash completed at the acquisition date. For public business flows and the appropriate discount rates are in part based entities, ASU 2015-16 is effective for fiscal years beginning upon historical experience, financial forecasts and industry after December 15, 2015, including interim periods within trends and conditions. those fiscal years. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the guidance, with earlier application permitted for financial statements that have NEW ACCOUNTING not been issued. Our early adoption of ASU 2015-16 in the PRONOUNCEMENTS & third quarter of 2015 did not have a material impact on our DEVELOPMENTS consolidated financial statements. Simplifying the Balance Sheet ADOPTED IN 2015 Classification of Deferred Taxes (Topic 740): Income Taxes Simplifying the Presentation of Debt In November 2015, the FASB issued ASU 2015-17 Issuance Costs amending the accounting for income taxes and requiring In April 2015, the FASB issued ASU 2015-03, which all deferred tax assets and liabilities to be classified as non- requires debt issuance costs related to a debt liability to be current on the consolidated balance sheet. The ASU is presented in the balance sheet as a direct deduction from effective for reporting periods beginning after December the carrying amount of the debt liability instead of being 15, 2016, with early adoption permitted. The ASU may be presented as an asset. The recognition and measurement adopted either prospectively or retrospectively. We guidance for debt issuance costs has not changed. ASU adopted this update as of December 31, 2015 and applied 2015-03 requires retrospective application and represents the change retrospectively to January 1, 2014 for prior a change in accounting principle. ASU 2015-03 is effective period balances of deferred tax assets and liabilities, for fiscal years beginning after December 15, 2015 and resulting in a $3.6 million reduction in total current assets early adoption is permitted for financial statements that and corresponding increase in long term assets, along with have not been previously issued. We adopted this update a $0.4 million reduction in total current liabilities and in the fourth quarter of 2015. We applied the change corresponding increase in long term liabilities on our retrospectively to January 1, 2014 for prior period balances consolidated balance sheet as of December 31, 2014. of unamortized debt issuance costs, resulting in a $1.5 million (CDN $2.0 million) reduction in other assets and TO BE ADOPTED IN THE FUTURE long-term debt on our consolidated balance sheet as of December 31, 2014. Revenue Simplifying the Accounting for In May 2014, Financial Accounting Standards Board Measurement-Period Adjustments (“FASB”) issued ASU 2014-09, Revenue From Contracts (Topic 805): Business Combinations With Customers (“Topic 606”). Topic 606 removes inconsistencies and weaknesses in revenue requirements, In September 2015, the FASB issued ASU 2015-16, which provides a more robust framework for addressing revenue replaces the requirement that an acquirer in a business

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issues, improves comparability of revenue recognition Simplifying the Measurement of practices across entities, industries, jurisdictions and Inventory (Topic 330): Inventory capital markets, provides more useful information to users of financial statements through improved disclosure In July 2015, the FASB issued ASU 2015-11, which requires requirements and simplifies the preparation of financial an entity to measure inventory at the lower of cost or net statements by reducing the number of requirements to realizable value, which consists of the estimated selling which an entity must refer. The guidance in this update prices in the ordinary course of business, less reasonably supersedes the revenue recognition requirements in Topic predictable cost of completion, disposal, and 605, Revenue Recognition, and most industry-specific transportation. For public entities, the updated guidance is guidance throughout the Industry Topics of the effective for fiscal years beginning after December 15, Codification. Additionally, this update supersedes some 2016, including interim periods within those fiscal years. cost guidance included in Subtopic 605-35, Revenue The guidance is to be applied prospectively with earlier Recognition - Construction-Type and Production-Type application permitted as of the beginning of an interim or Contracts. Topic 606 is effective for public entities with annual reporting period. The Company does not anticipate reporting periods beginning after December 15, 2017. Early a material impact to the Company’s financial statements as adoption would be permitted as of the original effective a result of this change. date in ASU 2014-09 (i.e., annual reporting periods beginning after December 15, 2016, including interim reporting periods within the annual periods). The Company has not yet evaluated the impact of the adoption DISCLOSURE of this new standard. CONTROLS & Going Concern PROCEDURES & In August 2014, the FASB issued ASU 2014-15 INTERNAL CONTROLS Presentation of Financial Statements - Going Concern, outlining management’s responsibility to evaluate whether OVER FINANCIAL there is substantial doubt about an entity’s ability to continue as a going concern, along with the required REPORTING disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016 with early adoption EVALUATION OF DISCLOSURE permitted. The Company does not anticipate a material CONTROLS & PROCEDURES impact to the Company’s financial statements as a result of this change. Our disclosure controls and procedures are designed to provide reasonable assurance that relevant information is Amendments to the Consolidation gathered and reported to senior management, including Analysis (Topic 810): Consolidation the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely basis such that In February 2015 the FASB issued ASU 2015-02, which appropriate decisions can be made regarding public revises the current consolidation guidance which results in disclosures. As of the end of the period covered by this a change in the determination of whether an entity report, we evaluated, under the supervision and with the consolidates certain types of legal entities. The Company is participation of management, including the CEO and CFO, currently assessing the impact of the new standard on its the effectiveness of the design and operation of our consolidated financial statements. The new standard is disclosure controls and procedures, as defined in Rules effective for annual and interim reporting periods 13a-15(e) and 15d-15(e) of the Securities Exchange Act of beginning after December 15, 2015 and may be applied on 1934, as amended (“Exchange Act”). a full or modified retrospective basis.

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MANAGEMENT'S REPORT ON and CFO concluded that our disclosure controls and procedures were not effective at a reasonable assurance INTERNAL CONTROL OVER level as of December 31, 2014. Accordingly, management FINANCIAL REPORTING had concluded that the Company's internal control over financial reporting was not effective as of December 31, The Company's management is responsible for 2014. In response to the identified material weakness, establishing and maintaining adequate internal control management took specific actions to address the material over financial reporting, as such term is defined in Rule weakness as further described in our amended 13a-15(f) promulgated under the Exchange Act. Our Management’s Discussion and Analysis for the year ended internal control over financial reporting is designed under December 31, 2014 filed on July 23, 2015. As a result of our supervision, and affected by the Company’s board of these actions, management has concluded that the directors, management, and other personnel, to provide material weakness has been remediated as of December 31, reasonable assurance regarding the reliability of financial 2015. reporting and the preparation of the Company’s consolidated financial statements for external reporting Management, including the CEO and CFO, has evaluated purposes in accordance with U.S. GAAP and the the effectiveness of our internal control over financial requirements of the SEC, as applicable. There are inherent reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the limitations in the effectiveness of internal control over Exchange Act, in relation to criteria described in Internal financial reporting, including the possibility that Control-Integrated Framework (2013) issued by the misstatements may not be prevented or detected. Committee of Sponsoring Organizations of the Treadway Accordingly, even effective internal controls over financial Commission (“COSO”). Based on this evaluation, reporting can provide only reasonable assurance with management has determined that our internal control over respect to financial statement preparation. Furthermore, financial reporting was effective as of December 31, 2015. the effectiveness of internal controls can change with KPMG LLP, our independent registered public accounting circumstances. firm, has audited our consolidated financial statements All internal control systems, no matter how well designed and expressed an unqualified opinion thereon. KPMG has and operated, can provide only reasonable, not absolute, also expressed an unqualified opinion on the effective assurance that the control system’s objectives will be met. operation of our internal control over financial reporting Because of the inherent limitations in all control systems, as of December 31, 2015. no evaluation of controls can provide absolute assurance that all control issues have been detected. The design of CHANGES IN INTERNAL any system of controls is based in part on certain assumptions about the likelihood of future events, and CONTROL OVER FINANCIAL there can be no assurance that any design will succeed in REPORTING achieving its stated goals under potential future Other than the changes described above with respect to the conditions, regardless of how remote. Therefore, even remediation of the material weakness at December 31, those systems determined to be effective can provide only 2014, there were no changes in our internal control over reasonable assurance with respect to financial statement financial reporting that occurred during the year ended preparation and presentation. December 31, 2015 that have materially affected, or are On July 23, 2015, we reported that we had identified a reasonably likely to materially affect, our internal controls material weakness in our internal control over financial over financial reporting. reporting as further described in our amended Management’s Discussion and Analysis for the year ended December 31, 2014. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, our CEO

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 33 MANAGEMENT'S DISCUSSION AND ANALYSIS » SUMMARY OF QUARTERLY RESULTS

research and development project cycles, timing of related SUMMARY OF government funding, impairment charges, stock-based compensation awards and foreign exchange impacts. Net QUARTERLY RESULTS loss has and can vary significantly from one quarter to another depending on operating results, gains and losses DISCUSSION OF THE QUARTER from investing activities, recognition of tax benefits and ENDED DECEMBER 31, 2015 other similar events.

Our revenues and operating results can vary significantly The following table provides summary unaudited from quarter to quarter depending on the timing of consolidated financial data for our last eight quarters: product deliveries, product mix, product launch dates,

SELECTED CONSOLIDATED QUARTERLY OPERATIONS DATA (unaudited)

(expressed in millions of United States dollars except for per share amounts) 2014 2015 Three months ended: Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Product revenue (1) $ 34.8 $ 31.8 $ 24.0 $ 27.4 $ 27.0 $ 24.6 $ 21.3 $ 24.9 Service and other revenue 5.1 6.1 1.4 — 1.0 3.2 1.0 0.2 Total revenue 39.9 37.9 25.4 27.4 28.0 27.8 22.3 25.1 Cost of product and parts revenue 27.6 24.3 17.3 28.7 22.6 18.1 21.0 21.6 Gross margin $ 12.3 $ 13.6 $ 8.1 $ (1.3) $ 5.4 $ 9.7 $ 1.3 $ 3.5 Gross margin percentage 30.8% 35.9% 31.9% (4.7)% 19.3% 34.9% 5.8% 13.9% Net loss for the period $ (23.9) $ (35.4) $ (25.5) $ (64.8) $ (17.2) $ (20.5) $ (37.4) $ (23.3) EBITDA (2) $ (18.8) $ (28.8) $ (20.8) $ (57.5) $ (11.7) $ (14.8) $ (32.5) $ (19.3) Adjusted EBITDA (3) $ (22.1) $ (16.9) $ (22.0) $ (23.0) $ (9.2) $ (7.7) $ (9.8) $ (12.3)

Loss per share Basic and diluted $ (0.38) $ (0.56) $ (0.40) $ (1.03) $ (0.30) $ (0.30) $ (0.58) $ (0.35)

Income from unconsolidated joint ventures CWI net income attributable to the Company $ (0.8) $ 0.4 $ 0.9 $ 7.6 $ 5.9 $ 3.4 $ 3.5 $ 4.3 WWI net income attributable to the Company $ 0.5 $ 0.7 $ 1.2 $ 3.6 $ 0.3 $ 0.1 $ 0.1 $ 0.5

1. In 2014, the Company combined the parts revenue with product revenue into a single line item in the consolidated statement of operations and comprehensive loss for all periods presented. 2. The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to U.S. GAAP. See non-GAAP measures for more information. 3. The term Adjusted EBITDA is not defined under U.S. GAAP and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Westport defines Adjusted EBITDA as EBITDA adjusted for amortization of stock-based compensation, unrealized foreign exchange gain or loss, and non-cash and other unusual adjustments. See non-GAAP measures for more information.

primarily relates to lower SG&A and R+D costs in 2015 THREE MONTHS ENDED and higher non-cash and other unusual adjustments taken DECEMBER 31, 2015 & 2014 in the fourth quarter of 2014. Our consolidated revenue for the three months ended NON-GAAP MEASURES December 31, 2015 was $25.1 million, a decrease of $2.3 million, or 8.4%, from $27.4 million for the three months We use certain non-GAAP measures to assist in assessing ended December 31, 2014. our financial performance. Non-GAAP measures do not have any standardized meaning prescribed in U.S. GAAP Our consolidated net loss for the three months ended and are therefore unlikely to be comparable to similar December 31, 2015 was $23.3 million, or a loss of $0.36 measures presented by other companies. per diluted share, compared to a net loss of $64.8 million, or a loss of $1.03 per diluted share, for the three months ended December 31, 2014. The decrease in net loss

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EBITDA such measures do not have any standardized meaning under U.S. GAAP. These measures should not be The term EBITDA (earnings before interest, taxes, considered in isolation or as a substitute for measures of depreciation and amortization) is a non-GAAP financial performance prepared in accordance with U.S. GAAP. measure. The Company defines EBITDA as loss before Other issuers may define EBITDA differently. income taxes adjusted for interest expense (net) and depreciation and amortization. EBITDA increased $13.2 million in the three months Management believes that EBITDA is an important ended December 31, 2015 to a loss of $19.3 million from a indicator commonly reported and widely used by investors loss of $32.5 million for the three months ended and analysts as an indicator of the Company’s operating September 30, 2015 primarily as a result of a goodwill performance and ability. The intent is to provide impairment charge taken in the third quarter of 2015. additional useful information to investors and analysts and

QUARTERLY EBITDA DATA 2014 2015 Three months ended: Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Loss before income taxes $ (23.9) $ (35.1) $ (26.2) $ (65.1) $ (16.7) $ (19.9) $ (37.2) $ (23.9) Interest expense, net (1) 0.8 1.7 0.7 2.5 1.4 1.6 1.4 1.3 Depreciation 4.3 4.6 4.7 5.1 3.6 3.5 3.3 3.3 EBITDA $ (18.8) $ (28.8) $ (20.8) $ (57.5) $ (11.7) $ (14.8) $ (32.5) $ (19.3)

1. Interest expense, net is the aggregate of bank charges, interest, and other, interest on long term-debt and amortization of discount.

ADJUSTED EBITDA performance, investors should not consider Adjusted EBITDA in isolation, or as a substitute for net loss or other The term Adjusted EBITDA is not defined under U.S. consolidated statement of operations data prepared in GAAP and is not a measure of operating income, operating accordance with U.S. GAAP. Among other things, performance or liquidity presented in accordance with U.S. Adjusted EBITDA does not reflect Westport’s actual cash GAAP. expenditures. Other companies may calculate similar measures differently than Westport, limiting their Adjusted EBITDA is used by management to review usefulness as comparative tools. Westport compensates for operational progress of its business units and investment these limitations by relying primarily on its U.S. GAAP programs over successive periods and as a long-term results. indicator of operational performance since it ties closely to the unit’s ability to generate sustained cash flows. Adjusted EBITDA decreased $2.5 million in the three months ended December 31, 2015 to a loss of $12.3 million Westport defines Adjusted EBITDA as EBITDA adjusted from a loss of $9.8 million for the three months ended for stock-based compensation, unrealized foreign September 30, 2015 primarily as a result of lower margins, exchange gain or loss, and non-cash and other unusual and higher R&D and SG&A expenses. adjustments. Adjusted EBITDA has limitations as an analytical tool, and when assessing Westport’s operating

QUARTERLY ADJUSTED EBITDA DATA 2014 2015 Three months ended: Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 EBITDA $ (18.8) $ (28.8) $ (20.8) $ (57.5) $ (11.7) $ (14.8) $ (32.5) $ (19.3) Stock based compensation 4.7 3.3 1.0 — 3.4 4.7 3.3 3.5 Unrealized foreign exchange (gain) loss (8.9) 8.6 (2.2) (0.9) (2.9) (1.2) (8.0) 0.5 Non-cash and other unusual adjustments (1) 0.9 — — 35.4 2.0 3.6 27.4 3.0 Adjusted EBITDA $ (22.1) $ (16.9) $ (22.0) $ (23.0) $ (9.2) $ (7.7) $ (9.8) $ (12.3)

1. Non-cash and other unusual adjustments include impairment of long lived assets, provision for inventory purchase commitments, intangible impairment, goodwill impairment, one time inventory obsolescence charges and one time costs related to the proposed merger between the Company and Fuel Systems. The three month ended December 31, 2015 figure included other unusual adjustments related to the discontinuation of the first generation of Westport HPDI systems.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 35 MANAGEMENT'S DISCUSSION AND ANALYSIS » RELATED PARTY TRANSACTIONS RELATED PARTY TRANSACTIONS BUSINESS RISKS AND As part of our joint venture agreement, we engage in UNCERTAINTIES transactions with CWI. An investment in our business involves risk and readers As at December 31, 2015, net amounts due from CWI total should carefully consider the risks described in our AIF $1.2 million (2014 – $2.5 million). Amounts receivable and other filings on www.sedar.com and www.sec.gov. relate to costs incurred by the Company on behalf of CWI. Our ability to generate revenue and profit from our The amounts are generally reimbursed by CWI to the technologies is dependent on a number of factors, and the Company in the month following the month in which the risks discussed in our AIF, if they were to occur, could have payable is incurred. Cost reimbursements from CWI a material impact on our business, financial condition, consisted of the following: liquidity, results of operation or prospects. While we have attempted to identify the primary known risks that are COST REIMBURSEMENTS FROM CWI material to our business, the risks and uncertainties 2015 2014 2013 discussed in our AIF may not be the only ones we face. Research and development $ — $ — $ 0.2 Additional risks and uncertainties, including those that we General and administrative 0.9 1.5 1.4 do not know about now or that we currently believe are Sales and marketing 4.8 4.9 4.7 immaterial may also adversely affect our business, Total $ 5.7 $ 6.5 $ 6.3 financial condition, liquidity, results of operation or prospects. A full discussion of the risks impacting our All material transactions between the Company and CWI business is contained in the AIF for the year ended have been eliminated on application of equity accounting. December 31, 2015 under the heading “Risk Factors” and is SUBSEQUENT EVENTS available on SEDAR at www.sedar.com.

See the "General Developments" section of this MD&A for updates related to Cartesian Financing and The Merger with Fuel Systems Solutions, Inc.

36 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT REPORTS INDEPENDENT Opinion In our opinion, the consolidated financial statements present AUDITORS’ REPORT OF fairly, in all material respects, the consolidated financial position of Westport Innovations Inc. as at December 31, 2015, and its REGISTERED PUBLIC consolidated results of operations and its consolidated cash flows for the years ended December 31, 2015 and December 31, 2013, in ACCOUNTING FIRM accordance with US generally accepted accounting principles. To the Shareholders of Westport Innovations Inc. Comparative Information

We have audited the accompanying consolidated financial Without modifying our opinion, we draw attention to [Note 3(a)] statements of Westport Innovations Inc., which comprise the to the consolidated financial statements which indicates that the consolidated balance sheet as at December 31, 2015, the comparative information presented as at and for the year ended consolidated statements of operations and comprehensive December 31, 2014 has been adjusted for the adoption of new income, shareholders’ equity and cash flows for the years ended accounting standards in 2015. December 31, 2015 and December 31, 2013 and notes, comprising a summary of significant accounting policies and other The consolidated financial statements of Westport Innovations Inc. explanatory information. as at and for the year ended December 31, 2014, excluding the adjustments described in [Note 3(a)] to the consolidated financial Management’s Responsibility for the Consolidated statements, were audited by another auditor who expressed an Financial Statements unmodified opinion on those financial statements on March 9, 2015 (October 15, 2015 as to the change in reportable segments discussed Management is responsible for the preparation and fair in [Note 23] to the consolidated financial statements). presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles, As part of our audit of the consolidated financial statements as at and for such internal control as management determines is and for the year ended December 31, 2015, we audited the necessary to enable the preparation of consolidated financial adjustments described in [Note 3(a)] to the consolidated financial statements that are free from material misstatement, whether statements that were applied to adjust the comparative due to fraud or error. information presented as at and for the year ended December 31, 2014. In our opinion, the adjustments are appropriate and have Auditors’ Responsibility been properly applied. Our responsibility is to express an opinion on these consolidated We were not engaged to audit, review, or apply any procedures to financial statements based on our audits. We conducted our the December 31, 2014 consolidated financial statements, other audits in accordance with Canadian generally accepted auditing than with respect to the adjustments described in [Note 3(a)] to standards and the standards of the Public Company Accounting the consolidated financial statements. Accordingly, we do not Oversight Board (United States). Those standards require that we express an opinion or any other form of assurance on those comply with ethical requirements and plan and perform the audit financial statements taken as a whole. to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Other Matter

An audit involves performing procedures to obtain audit evidence We also have audited, in accordance with the standards of the Public about the amounts and disclosures in the consolidated financial Company Accounting Oversight Board (United States), Westport statements. The procedures selected depend on our judgment, Innovations Inc.’s internal control over financial reporting as of including the assessment of the risks of material misstatement of December 31, 2015, based on the criteria established in Internal the consolidated financial statements, whether due to fraud or Control – Integrated Framework (2013) issued by the Committee error. In making those risk assessments, we consider internal of Sponsoring Organizations of the Treadway Commission control relevant to the entity’s preparation and fair presentation ("COSO"), and our report dated March 29, 2016 expressed an of the consolidated financial statements in order to design audit unmodified (unqualified) opinion on the effectiveness of Westport procedures that are appropriate in the circumstances. An audit Innovations Inc.’s internal control over financial reporting. also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. KPMG LLP We believe that the audit evidence we have obtained in our audits Chartered Professional Accountants is sufficient and appropriate to provide a basis for our audit March 29, 2016 opinion. Vancouver, Canada

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 37 REPORTS

the company’s assets that could have a material effect on the REPORT OF financial statements. INDEPENDENT Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, REGISTERED PUBLIC projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ACCOUNTING FIRM of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. To the Shareholders of Westport Innovations Inc. In our opinion, the Company maintained, in all material respects, We have audited Westport Innovations Inc.’s (“the Company”) effective internal control over financial reporting as of December internal control over financial reporting as of December 31, 2015, 31, 2015, based on the criteria established in Internal Control – based on the criteria established in Internal Control – Integrated Integrated Framework (2013) issued by the Committee of Framework (2013) issued by the Committee of Sponsoring Sponsoring Organizations of the Treadway Commission Organizations of the Treadway Commission (“COSO”). The ("COSO"). Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of We also have audited, in accordance with Canadian generally the effectiveness of internal control over financial reporting, accepted auditing standards and the standards of the Public included in the accompanying “Management’s Report on Company Accounting Oversight Board (United States), the Financial Statements and Assessment of Internal Control over consolidated balance sheet of the Company as of December 31, Financial Reporting”. Our responsibility is to express an opinion 2015, and the consolidated statements of operations and on the Company’s internal control over financial reporting based comprehensive income, shareholders’ equity and cash flows for on our audit. the years ended December 31, 2015 and December 31, 2013 and our report dated March 29, 2016 expressed an unqualified We conducted our audit in accordance with the standards of the opinion on those consolidated financial statements. Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design KPMG LLP and operating effectiveness of internal control based on the Chartered Professional Accountants assessed risk. Our audit also included performing such other March 29, 2016 procedures as we considered necessary in the circumstances. We Vancouver, Canada believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that 1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; 2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and 3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of

38 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT REPORTS

the reasonableness of accounting estimates made by REPORT OF management, as well as evaluating the overall presentation of the INDEPENDENT consolidated financial statements. We believe that the audit evidence we have obtained is sufficient REGISTERED PUBLIC and appropriate to provide a basis for our audit opinion. ACCOUNTING FIRM Opinion To the Board of Directors and Shareholders of Westport In our opinion, such 2014 consolidated financial statements, Innovations Inc. before the effects of the adjustments to retrospectively apply accounting standards adopted in 2015 as discussed in [Note 3] to We have audited, before the effects of the adjustments to the consolidated financial statements, present fairly, in all retrospectively apply accounting standards adopted in 2015 as material respects, the financial position of Westport Innovations discussed in Note 3 to the consolidated financial statements, the Inc. and subsidiaries as at December 31, 2014, and its financial accompanying consolidated financial statements of Westport performance and its cash flows for the year ended December 31, Innovations Inc. and subsidiaries (the “Company”), which 2014 in accordance with accounting principles generally accepted comprise the consolidated balance sheet as of December 31, 2014, in the United States of America. and consolidated statements of operations and comprehensive (loss) income, changes in shareholders’ equity and cash flows for Other Matter the year ended December 31, 2014 and a summary of significant We were not engaged to audit, review, or apply any procedures to accounting policies and other explanatory information, (the 2014 the adjustments to retrospectively apply accounting standards consolidated financial statements before the effects of the adopted in 2015 as discussed in [Note 3] to the consolidated adjustments discussed in [Note 3] to the consolidated financial financial statements and, accordingly, we do not express an statements are not presented herein). opinion on any other form of assurance about whether such Management's Responsibility for the Consolidated retrospective adjustments are appropriate and have been Financial Statements properly applied. Those retrospective adjustments were audited by other auditors. Management is responsible for the preparation and fair presentation of these consolidated financial statements in /s/ Deloitte LLP accordance with accounting principles generally accepted in the Chartered Professional Accountants United States of America, and for such internal control as Vancouver, Canada management determines is necessary to enable the preparation of March 9, 2015 consolidated financial statements that are free from material (October 15, 2015 as to the change in reportable segments misstatement, whether due to fraud or error. discussed in [Note 23] to the consolidated financial statements)

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 39 CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET (expressed in thousands of United States dollars, except share amounts) 2015 2014 ASSETS Current Assets Cash and cash equivalents $ 27,143 $ 93,282 Short-term investments 696 723 Accounts receivable [note 5] 38,324 46,849 Inventories [note 6] 35,660 41,824 Prepaid expenses 3,475 4,641 105,298 187,319 Long-term investments [note 7] 31,111 33,324 Other assets 2,863 1,973 Property, plant and equipment [note 9] 42,527 58,134 Intangible assets [note 10] 22,307 27,920 Deferred income tax assets [note 19(b)] 2,538 3,827 Goodwill [note 11] 3,008 23,352 $ 209,652 $ 335,849 LIABILITIES & SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable and accrued liabilities [note 12] $ 57,454 $ 55,502 Current portion of deferred revenue 1,779 1,782 Current portion of long-term debt [note 13] 8,257 18,955 Current portion of warranty liability [note 14] 5,554 9,696 73,044 85,935 Warranty liability [note 14] 8,437 13,413 Long-term debt [note 13] 54,190 57,741 Deferred revenue 1,513 3,795 Deferred income tax liabilities [note 19(b)] 3,570 5,352 Other long-term liabilities [note 15] 1,302 1,605 142,056 167,841 Shareholders’ Equity Share capital [note 17] Authorized: Unlimited common shares, no par value Unlimited preferred shares in series, no par value Issued: 64,380,819 (2014 – 63,480,722) common shares 937,029 930,857 Other equity instruments 16,460 7,767 Additional paid in capital 9,837 9,837 Accumulated deficit (863,348) (764,960) Accumulated other comprehensive income (32,382) (15,493) 67,596 168,008 Commitments and contingencies [note 22] $ 209,652 $ 335,849

See accompanying notes to consolidated financial statements. Approved on behalf of the Board:

Brenda J. Eprile Warren Baker Director Director

40 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS) Years ended December 31

(expressed in thousands of United States dollars, except share and per share amounts) 2015 2014 2013

Product revenue $ 97,844 $ 118,015 $ 148,001 Service and other revenue [note 21] 5,460 12,554 16,031 103,304 130,569 164,032

COST OF REVENUE & EXPENSES Cost of product revenue 83,314 97,923 148,690 Research and development [note 17(d)] [note 18] 52,777 76,580 91,132 General and administrative [note 17(d)] 35,201 40,319 46,475 Sales and marketing [note 17(d)] 17,496 25,489 28,707 Foreign exchange (gain) loss (11,601) (3,433) (15,168) Depreciation and amortization [note 9] [note 10] 13,654 18,666 16,288 Bank charges, interest and other 378 703 595 Impairment of long lived assets 4,015 5,238 4,838 Provision for inventory purchase commitments [note 12] [note 22(b)] — 4,106 — Intangible impairment [note 10] — 5,823 1,721 Goodwill impairment [note 11] 18,707 18,543 34,964 213,941 289,957 358,242

Loss from operations (110,637) (159,388) (194,210) Income from investments accounted for by the equity method 18,317 14,222 13,444 Interest on long-term debt and amortization of discount (5,529) (5,849) (4,789) Interest and other income 192 817 1,018 Loss before income taxes (97,657) (150,198) (184,537)

INCOME TAX EXPENSE (RECOVERY) [note 19] Current 1,245 606 1,414 Deferred (514) (1,185) (541) 731 (579) 873

Net loss for the year $ (98,388) $ (149,619) $ (185,410)

OTHER COMPREHENSIVE INCOME (LOSS) Cumulative translation adjustment (16,889) (15,201) (17,308) Comprehensive loss $ (115,277) $ (164,820) $ (202,718)

LOSS PER SHARE Basic and diluted $ (1.53) $ (2.37) $ (3.22)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic and diluted 64,109,703 63,130,022 57,633,190

See accompanying notes to consolidated financial statements.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 41 FINANCIAL STATEMENTS » CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumulated Common other Total (expressed in thousands of United States dollars, shares Share Other equity Additional paid Accumulated comprehensive shareholders' except share amounts) outstanding capital instruments in capital deficit income (loss) equity

JANUARY 1, 2013 55,294,091 $ 733,385 $ 9,228 $ 6,384 $ (429,932) $ 17,016 $ 336,081

Issue of common shares: On exercise of stock options 111,986 1,147 — (406) — — 741 On exercise of share units 609,200 10,599 (10,599) — — — — In connection with acquisition 718,485 24,091 — — — — 24,091 On public offering 6,000,000 152,340 — — — — 152,340 Acquisition to be settled by issuance of common shares — — 3,285 — — — 3,285 Share issue costs — (5,065) — — — — (5,065) Stock-based compensation — — 11,920 2,227 — — 14,147 Net loss for the year — — — — (185,410) — (185,410) Other comprehensive loss — — — — — (17,308) (17,308)

DECEMBER 31, 2013 62,733,762 916,497 13,834 8,205 (615,342) (292) 322,902

Issue of common shares: On exercise of stock options 43,071 374 — (132) — — 242 On exercise of share units 608,975 10,701 (10,701) — — — — In connection with acquisition 94,914 3,285 (3,285) — — — — Stock-based compensation — — 7,919 1,764 — — 9,683 Net loss for the year — — — — (149,619) — (149,619) Other comprehensive loss — — — — — (15,201) (15,201)

DECEMBER 31, 2014 63,480,722 930,857 7,767 9,837 (764,960) (15,493) 168,008

Issue of common shares: On exercise of share units 575,024 5,010 (5,010) — — — — In connection with acquisition 325,073 1,162 — — — — 1,162 Stock-based compensation — — 13,703 — — — 13,703 Net loss for the year — — — — (98,388) — (98,388) Other comprehensive loss — — — — — (16,889) (16,889)

DECEMBER 31, 2015 64,380,819 $ 937,029 $ 16,460 $ 9,837 $ (863,348) $ (32,382) $ 67,596

See accompanying notes to consolidated financial statements.

42 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » CONSOLIDATED STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 (expressed in thousands of United States dollars) 2015 2014 2013 CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net loss for the year $ (98,388) $ (149,619) $ (185,410) Items not Involving Cash Depreciation and amortization 13,654 18,666 16,288 Stock-based compensation expense 14,871 9,683 14,283 Unrealized foreign exchange gain (11,601) (3,434) (15,168) Deferred income tax (recovery) expense (514) (1,185) (541) Income from investments accounted for by the equity method (18,317) (14,222) (13,444) Amortization of long-term debt 876 2,139 1,643 Impairment of long lived assets 4,015 5,238 4,838 Inventory write-downs to net realizable value 8,743 2,102 4,925 Provision for inventory purchase commitments — 4,106 — Intangible impairment — 5,823 1,721 Goodwill impairment 18,707 18,543 34,964 Change in fair value of derivative liability and bad debt expense 587 1,338 (37) Changes in Non-Cash Operating Working Capital Accounts receivable 975 11,629 (12,289) Inventories (5,997) (1,367) 5,179 Prepaid expenses 661 (556) 513 Accounts payable and accrued liabilities 9,526 (4,749) (2,064) Deferred revenue (1,507) (5,096) 5,208 Warranty liability (5,359) (5,797) 22,602 (69,068) (106,758) (116,789) CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES Purchase of property, plant and equipment (4,845) (10,249) (26,450) Maturity (purchase) of short-term investments, net — 31,369 (5,771) Acquisitions, net of acquired cash [note 4] 787 (3,053) 1,178 Dividends received from joint ventures 20,464 3,200 8,287 16,406 21,267 (22,756) CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES Repayment of operating lines of credit and long term facilities (8,308) (9,540) (13,678) Increase in operating lines of credit and issuance of long term facilities 5,432 17,797 — Finance costs incurred — (2,033) — Proceeds from stock options exercised — 242 741 Shares issued for cash — — 152,340 Share issuance costs — — (5,065) (2,876) 6,466 134,338

Effect of foreign exchange on cash and cash equivalents (10,601) (6,206) (5,238)

Decrease in cash and cash equivalents (66,139) (85,231) (10,445)

Cash and cash equivalents, beginning of year 93,282 178,513 188,958

Cash and cash equivalents, end of year $ 27,143 $ 93,282 $ 178,513

SUPPLEMENTARY INFORMATION Interest paid $ 4,551 $ 4,702 $ 3,911 Taxes paid, net of refunds 1,238 871 1,321 Non-Cash Transactions Shares issued on exercise of share units 5,010 10,701 10,599

See accompanying notes to consolidated financial statements.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 43 FINANCIAL STATEMENTS » NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These consolidated financial statements are presented in NOTES TO accordance with accounting principles generally accepted CONSOLIDTATED in the United States of America (“U.S. GAAP”). The Company has sustained net losses since inception and FINANCIAL as at December 31, 2015 has an accumulated deficit of STATEMENTS $863,348. As at December 31, 2015 the Company has cash and cash equivalents of $27,143. The Company’s ability to continue as a going concern is dependent on its available 1. COMPANY ORGANIZATION cash, its ability to find new sources of financing or raise & OPERATIONS cash through the sale of assets while in pursuit of operating profitability. There can be no assurance that the Westport Innovations Inc. (the “Company”) was Company will be successful in achieving its objectives. incorporated under the Business Corporations Act Management believes that the cash balances available as of (Alberta) on March 20, 1995. December 31, 2015, combined with cost cutting measures The Company is a provider of high-performance, low- in place and its ability to find new sources of financing or emission engine and fuel system technologies utilizing raise cash through the sale of assets subsequent to the gaseous fuels. Its technology and products enable light- balance sheet date, provides sufficient funds for the duty (<5.9 litre), medium-duty (5.9 to 10 litre), heavy-duty Company to meet its obligations beyond the next 12 (11 to 16 litre) and high horsepower (>16 litre) petroleum- months. The accompanying financial statements do not based fuel engines to use primarily natural gas, giving include any adjustments that might be necessary if the users a cleaner, more plentiful and generally less expensive Company is unable to continue as a going concern. See also alternative fuel. "Cartesian Financing" and "Merger with Fuel Systems Solutions, Inc." in Note 25 of these financial statements for The Company is focused on developing technology to cash raised subsequent to year end. enable more environmentally sustainable engines without compromising the performance, fuel economy, durability b. Foreign Currency Translation and reliability of diesel engines. The substitution of natural gas for petroleum-based fuel drives a significant reduction The Company’s reporting currency for its consolidated in harmful combustion emissions, such as nitrogen oxides, financial statement presentation is the United States particulate matter and greenhouse gas, in addition to using dollar. The functional currencies of the Company’s an abundant, relatively inexpensive alternative fuel. The operations and subsidiaries include the following: United Company’s systems can be used to enable combustion States, Canadian ("CDN") and Australian dollar, Euro, engines to use gaseous fuels, such as natural gas, propane, Chinese Renminbi (“RMB”), and Swedish Krona. The renewable natural gas or hydrogen. The Company’s Company translates assets and liabilities of non-U.S. dollar research and development effort and investment have functional currency operations using the period end resulted in a substantial patent portfolio that serves as the exchange rates, shareholders’ equity balances using the foundation for its differentiated technology offerings and weighted average of historical exchange rates, and competitive advantage. revenues and expenses using the monthly average rate for the period with the resulting exchange differences recognized in other comprehensive income. 2. SIGNIFICANT ACCOUNTING Transactions that are denominated in currencies other POLICIES than the functional currency of the Company’s operations or its subsidiaries are translated at the rate in a. Basis of Presentation effect on the date of the transaction. Foreign currency The consolidated financial statements include the accounts denominated monetary assets and liabilities are translated of the Company, its wholly owned subsidiaries and variable to the applicable functional currency at the exchange rate interest entities (“VIEs”) for which the Company is in effect on the balance sheet date. Non-monetary assets considered the primary beneficiary. All intercompany and liabilities are translated at the historical exchange rate. balances and transactions have been eliminated on All foreign exchange gains and losses are recognized in the consolidation. statement of operations, except for the translation gains

44 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » NOTES » 2. SIGNIFICANT ACCOUNTING POLICIES and losses arising from available-for-sale instruments, that remain outstanding after the Company has used which are recorded through other comprehensive income reasonable collection efforts are written off through a until realized through disposal or impairment. charge to the valuation allowance and a credit to accounts receivable. Except as otherwise noted, all amounts in these financial statements are presented in U.S. dollars. For the periods f. Inventories presented, the Company used the following exchange rates: The Company’s inventories consist of the Company’s fuel system products (finished goods), work-in-progress, EXCHANGE RATES AS AT DEC 31 purchased parts and assembled parts. Inventories are Period end Average recorded at the lower of cost and net realizable value. Cost 2015 2014 2015 2014 is determined based on the lower of weighted average cost Canadian dollar 0.72 0.86 0.78 0.91 and net realizable value. The cost of fuel system product Australian dollar 0.73 0.82 0.75 0.90 inventories, assembled parts and work-in-progress Euro 1.09 1.21 1.11 1.33 includes materials, labour and production overhead RMB 0.15 0.16 0.16 0.16 including depreciation. The Company provides inventory Swedish Krona 0.12 0.13 0.12 0.15 write-downs based on excess and obsolete inventories determined primarily by future demand forecasts. In c. Cash and Cash Equivalents addition, the Company records a liability for firm, noncancelable, and unconditional purchase commitments Cash and cash equivalents includes cash, term deposits, with manufacturers for quantities in excess of the bankers acceptances and guaranteed investment Company’s future demand forecast consistent with its certificates with maturities of ninety days or less when valuation of excess and obsolete inventory. acquired. Cash equivalents are considered as held for trading and recorded at fair value with changes in fair g. Property, Plant & Equipment value recognized in the consolidated statements of operations. Property, plant and equipment are stated at cost. Depreciation is provided as follows: d. Short-term Investments DEPRECIATION CLASSES Short-term investments, consisting of investment grade Assets Basis Rate commercial paper, banker acceptances, bearer deposit Buildings Straight-line 15 years notes, guaranteed investment certificates and other term Computer equipment and deposits, are considered available for sale and recorded at software Straight-line 3 years fair value with changes in fair value recognized in Furniture and fixtures Straight-line 5 years accumulated other comprehensive income until realized. Machinery and equipment Straight-line 8-10 years A decline in value that is considered other than temporary Leasehold improvements Straight-line Lease term is recognized in net loss for the period. h. Long-term Investments e. Accounts Receivable, Net The Company accounts for investments in which it has Accounts receivable are measured at amortized cost. The significant influence, including VIEs for which the Company maintains allowances for doubtful accounts for Company is not the primary beneficiary, using the equity estimated losses resulting from the inability of its method of accounting. Under the equity method, the customers to make required payments. Past due balances Company recognizes its share of income from equity over 90 days are reviewed individually for collectibility. If accounted investees in the statement of operations with a the financial condition of the Company’s customers were corresponding increase in long-term investments. Any to deteriorate, adversely affecting their ability to make dividends paid or payable are credited against long-term payments, additional allowances would be required. Based investments. on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 45 FINANCIAL STATEMENTS » NOTES » 2. SIGNIFICANT ACCOUNTING POLICIES

i. Financial Liabilities the identifiable assets acquired and liabilities assumed. Goodwill is not amortized and instead is tested at least Accounts payable and accrued liabilities, short-term debt annually for impairment, or more frequently when events and long-term debt are measured at amortized cost. or changes in circumstances indicate that goodwill might Transaction costs relating to long-term debt are deferred be impaired. This impairment test is performed annually in other assets on initial recognition and are amortized at November 30. Future adverse changes in market using the effective interest rate method. conditions or poor operating results of underlying assets could result in an inability to recover the carrying value of j. Research & Development Costs the goodwill, thereby possibly requiring an impairment Research and development costs are expensed as incurred charge. and are recorded net of government funding received or A two-step test is used to identify a potential impairment receivable. and to measure the amount of impairment, if any. The first step is to compare the fair value of the reporting unit k. Government Assistance with its carrying amount, including goodwill. If the fair The Company periodically applies for financial assistance value of the reporting unit exceeds its carrying amount, under available government incentive programs, which is goodwill is considered not impaired; otherwise, goodwill is recorded in the period it is received or receivable. impaired and the loss is measured by performing step two. Government assistance relating to the purchase of Under step two, the impairment loss is measured by property, plant and equipment is reflected as a reduction comparing the implied fair value of the reporting unit of the cost of such assets. Government assistance related goodwill with the carrying amount of goodwill. to research and development activities is recorded as a Fair value is determined using widely accepted valuation reduction of the related expenditures. techniques, which may include discounted cash flows and market multiple analyses. These types of analyses contain l. Intangible Assets uncertainties because they require management to make Intangible assets consist primarily of the cost of assumptions and to apply judgment to estimate industry intellectual property, trademarks, technology, customer economic factors and the profitability of future business contracts and non-compete agreements. Intangible assets strategies. are amortized over their estimated useful lives, which range from 5 to 20 years. o. Warranty Liability Estimated warranty costs are recognized at the time the m. Impairment of Long-lived Assets Company sells its products and are included in cost of The Company reviews its long-lived assets for impairment revenue. The Company provides warranty coverage on whenever events or changes in circumstances indicate that products sold for a period ending two years from the date the carrying amount of the assets may not be recoverable. the products are put into service by customers. Warranty If such conditions exist, assets are considered impaired if liability represents the Company’s best estimate of the sum of the undiscounted expected future cash flows warranty costs expected to be incurred during the warranty expected to result from the use and eventual disposition of period. Furthermore, the current portion of warranty an asset is less than its carrying amount. An impairment liability represents the Company’s best estimate of the loss is measured at the amount by which the carrying costs to be incurred in the next twelve-month period. The amount of the asset exceeds its fair value. When quoted Company uses historical failure rates and cost to repair market prices are not available, the Company uses the defective products to estimate the warranty liability. New expected future cash flows discounted at a rate product launches require a greater use of judgment in commensurate with the risks associated with the recovery developing estimates until claims experience becomes of the asset as an estimate of fair value. available. Product specific experience is typically available four or five quarters after product launch, with a clear n. Goodwill Impairment experience trend not evident until eight to twelve quarters after launch. The Company records warranty expense for Goodwill is recorded at the time of purchase for the excess new products upon shipment using a factor based upon of the amount of the purchase price over the fair values of

46 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » NOTES » 2. SIGNIFICANT ACCOUNTING POLICIES historical experience from previous engine generations in proportionate performance method of accounting based on the first year, a blend of actual product and historical the performance of work under the research and experience in the second year and product specific development arrangement. All costs incurred related to experience thereafter. The amount payable by the revenue earned from research and development Company and the timing will depend on actual failure arrangements are recorded as research and development rates and cost to repair failures of its products. Since a expense as incurred. number of the Company’s products are new in the market, historical data may not necessarily reflect actual costs to be REVENUE FROM CONTRACTS incurred and may result in significant fluctuations in the The Company earns revenue under certain contracts to warranty liability. provide engineering development services. These contracts provide for the payment for services based on the p. Extended Warranty performance of work under product development The Company sells extended warranty contracts that programs. Revenues are recognized under these contracts provide coverage in addition to the basic warranty based on the percentage of completion method of coverage. Proceeds from the sale of these contracts are accounting. The components to measure percentage of deferred and amortized over the extended warranty period completion may include estimated costs to complete a commencing at the end of the basic warranty period. On a contract, estimated hours to completion or management’s periodic basis, management reviews the estimated costs assessment of work to be performed. When estimates of expected to be incurred related to servicing these contracts total costs to be incurred on a contract exceed total and recognizes a loss to the extent such costs exceed the estimates of revenue to be earned, a provision for the related deferred revenue. Extended warranty costs are entire loss on the contract is recorded in the period the loss expensed as period costs as incurred. is determined. Changes to the estimated percentage of completion of a contract may result in an adjustment to q. Revenue Recognition previously recognized revenues. All costs incurred related to revenue earned from contracts are recorded in cost of PRODUCT REVENUE products sold.

The Company’s primary source of revenue is from the sale Arrangements with customers may include multiple of kits, Westport LNG systems and parts, and Westport deliverables, including any combination of products, CNG and LPG fuel systems for OEMs in the light-duty services, and licenses. In these arrangements, the automotive and industrial markets. Product revenue is Company allocates revenue to all deliverables based on recognized when contractual terms are agreed upon, the their relative selling prices. The Company uses a hierarchy price is fixed or determinable, the products are shipped to determine the selling price to be used for allocating and title passes to the customer and collectability is revenue to deliverables: reasonably assured. i. vendor-specific objective evidence of fair value REVENUE FROM RESEARCH & ("VSOE"), DEVELOPMENT ii. third-party evidence of selling price ("TPE"), and

The Company also earns service revenue from research iii. best estimate of selling price ("BESP"), which are and development arrangements under which the Company determined as follows: provides contract services relating to developing natural VSOE In limited circumstances are products sold gas engines or biogas engines for use in products and separately in stand-alone arrangements. In determining providing ongoing development services to assist with the VSOE, the Company requires that a substantial majority of development and commercialization of products. These the selling prices for a product or service falls within a contracts provide for the payment for services based on reasonably narrow pricing range, generally evidenced by our achieving defined milestones or on the performance of the pricing rates of approximately 85% of such historical work under product development programs. Revenues are stand-alone transactions falling within plus or minus 10% recognized using the milestone method based on of the median rate. In addition, the Company considers the assessment of progress achieved against the defined geographies in which the products or services are sold, milestones. Revenue may also be recognized using the major product and service groups, customer classification,

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 47 FINANCIAL STATEMENTS » NOTES » 2. SIGNIFICANT ACCOUNTING POLICIES

and other environmental or marketing variables in tax assets and liabilities are determined based on the determining VSOE. temporary differences between the accounting basis and tax basis of the assets and liabilities and for loss carry- TPE VSOE exists only when the Company sells the forwards, tax credits and other tax attributes, using the deliverable separately. When VSOE does not exist, the enacted tax rates in effect for the years in which the Company attempts to determine TPE based on competitor differences are expected to reverse. The effect of a change prices for similar deliverables when sold separately. in tax rates on the deferred income tax assets and liabilities Generally, the Company’s go-to-market strategy for many is recognized in income in the period that includes the of its products differs from that of its peers and its enactment date. offerings contain a significant level of customization and differentiation such that the comparable pricing of The Company recognizes deferred income tax assets to the products with similar functionality sold by other extent the assets are more-likely-than-not to be realized. companies cannot be obtained. Furthermore, the Company In making such a determination the Company considers all is unable to reliably determine what similar competitor available positive and negative evidence, including future products’ selling prices are on a stand-alone basis. reversals of existing taxable temporary differences, Therefore, the Company is typically not able to determine projected future taxable income, tax-planning strategies, TPE. and results of recent operations. If it is determined that, based on all available evidence, it is more-likely-than-not BESP The objective of BESP is to determine the price at that some or all of the deferred income tax assets will not which the Company would transact a sale if the product or be realized, a valuation allowance is provided to reduce the service were sold on a stand-alone basis. When both VSOE deferred income tax assets. and TPE do not exist, the Company determines BESP by first collecting all reasonably available data points The Company uses a two-step process to recognize and including sales, cost and margin analysis of the product, measure the income tax benefit of uncertain tax positions and other inputs based on the Company’s normal pricing taken or expected to be taken in a tax return. The tax practices. Second, the Company makes any reasonably benefit from an uncertain tax position is recognized if it is required adjustments to the data based on market and more-likely-than-not that the position will be sustained Company-specific factors. Third, the Company stratifies upon examination by a tax authority based solely on the the data points, when appropriate, based on customer, technical merits of the position. A tax benefit that meets magnitude of the transaction and sales volume. the more-likely-than-not recognition threshold is measured as the largest amount that is greater than 50% Once elements of an arrangement are separated into more likely to be realized upon settlement with the tax authority. than one unit of accounting, revenue is recognized for each To the extent a full benefit is not expected to be realized, separate unit of accounting based on the nature of the an income tax liability is established. Any change in revenue as described above. judgment related to the expected resolution of an Changes in cost estimates and the fair values of certain uncertain tax position is recognized in the year of such a deliverables could negatively impact the Company’s change. operating results. In addition, unforeseen conditions could arise over the contract term that may have a significant 3. ACCOUNTING CHANGES impact on the Company’s operating results. a. New Accounting LICENSE REVENUE Pronouncements Adopted in Revenue from technology license fees is recognized over 2015 the duration of the licensing agreement. Amounts received in advance of the revenue recognition criteria being met SIMPLIFYING THE PRESENTATION OF DEBT are recorded as deferred revenue. ISSUANCE COSTS In April 2015, the FASB issued ASU 2015-03, which r. Income Taxes requires debt issuance costs related to a debt liability to be The Company accounts for income taxes using the asset presented in the balance sheet as a direct deduction from and liability method. Under this method, deferred income the carrying amount of the debt liability instead of being

48 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » NOTES » 3. ACCOUNTING CHANGES presented as an asset. The recognition and measurement adopted this update as of December 31, 2015 and applied guidance for debt issuance costs has not changed. ASU the change retrospectively to January 1, 2014 for prior 2015-03 requires retrospective application and represents period balances of deferred tax assets and liabilities, a change in accounting principle. ASU 2015-03 is effective resulting in a $3,556 reduction in total current assets and for fiscal years beginning after December 15, 2015 and corresponding increase in long term assets, along with a early adoption is permitted for financial statements that $398 reduction in total current liabilities and have not been previously issued. We adopted this update corresponding increase in long term liabilities on our in the fourth quarter of 2015. We applied the change consolidated balance sheet as of December 31, 2014. retrospectively to January 1, 2014 for prior period balances of unamortized debt issuance costs, resulting in a $1,486 b. New Accounting (CDN$1,964) reduction in other assets and long-term debt Pronouncements to be Adopted on our consolidated balance sheet as of December 31, in the Future 2014. REVENUE SIMPLIFYING THE ACCOUNTING FOR MEASUREMENT-PERIOD ADJUSTMENTS In May 2014, Financial Accounting Standards Board (TOPIC 805): BUSINESS COMBINATIONS (“FASB”) issued ASU 2014-09, Revenue From Contracts With Customers (“Topic 606”). Topic 606 removes In September 2015, the FASB issued ASU 2015-16, which inconsistencies and weaknesses in revenue requirements, replaces the requirement that an acquirer in a business provides a more robust framework for addressing revenue combination account for measurement period adjustments issues, improves comparability of revenue recognition retrospectively with a requirement that an acquirer practices across entities, industries, jurisdictions and recognize adjustments to the provisional amounts that are capital markets, provides more useful information to users identified during the measurement period in the reporting of financial statements through improved disclosure period in which the adjustment amounts are determined. requirements and simplifies the preparation of financial ASU 2015-16 requires that the acquirer record, in the same statements by reducing the number of requirements to period’s financial statements, the effect on earnings of which an entity must refer. The guidance in this update changes in depreciation, amortization, or other income supersedes the revenue recognition requirements in Topic effects, if any, as a result of the change to the provisional 605, Revenue Recognition, and most industry-specific amounts, calculated as if the accounting had been guidance throughout the Industry Topics of the completed at the acquisition date. For public business Codification. Additionally, this update supersedes some entities, ASU 2015-16 is effective for fiscal years beginning cost guidance included in Subtopic 605-35, Revenue after December 15, 2015, including interim periods within Recognition - Construction-Type and Production-Type those fiscal years. The guidance is to be applied Contracts. Topic 606 is effective for public entities with prospectively to adjustments to provisional amounts that reporting periods beginning after December 15, 2017. Early occur after the effective date of the guidance, with earlier adoption would be permitted as of the original effective application permitted for financial statements that have date in ASU 2014-09 (i.e., annual reporting periods not been issued. Our early adoption of ASU 2015-16 in the beginning after December 15, 2016, including interim third quarter of 2015 did not have a material impact on our reporting periods within the annual periods). The consolidated financial statements. Company has not yet evaluated the impact of the adoption of this new standard. SIMPLIFYING THE BALANCE SHEET CLASSIFICATION OF DEFERRED TAXES GOING CONCERN (TOPIC 740): INCOME TAXES In August 2014, the FASB issued ASU 2014-15 In November 2015, the FASB issued ASU 2015-17 Presentation of Financial Statements - Going Concern, amending the accounting for income taxes and requiring outlining management’s responsibility to evaluate whether all deferred tax assets and liabilities to be classified as non- there is substantial doubt about an entity’s ability to current on the consolidated balance sheet. The ASU is continue as a going concern, along with the required effective for reporting periods beginning after December disclosures. ASU 2014-15 is effective for the annual 15, 2016, with early adoption permitted. The ASU may be periods ending after December 15, 2016 with early adopted either prospectively or retrospectively. We

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adoption permitted. The Company does not anticipate a Corporate and Technology Investments segment during material impact to the Company’s financial statements as a the year ended December 31, 2014. result of this change. During the three months ended September 30, 2015, the AMENDMENTS TO THE CONSOLIDATION Company finalized the allocation of the purchase price to ANALYSIS (TOPIC 810): CONSOLIDATION the identifiable assets acquired and liabilities assumed based on it estimates of their fair values on the acquisition In February 2015 the FASB issued ASU 2015-02, which date. The measurement period adjustments to goodwill revises the current consolidation guidance which results in for the Prins acquisition were primarily due to a settlement a change in the determination of whether an entity agreement reached with the sellers during the third consolidates certain types of legal entities. The Company is quarter of 2015 for working capital disputes related to the currently assessing the impact of the new standard on its acquisition. The Company received a cash settlement of consolidated financial statements. The new standard is EUR 700 ($787) from the sellers, which contributed to the effective for annual and interim reporting periods purchase price of Prins being revised to EUR 11,500 beginning after December 15, 2015 and may be applied on ($14,230). The fair values of acquired assets and liabilities a full or modified retrospective basis. were revised from the estimated values filed on Form 40- SIMPLIFYING THE MEASUREMENT OF F/A on October 15, 2015 as a result of the Company’s INVENTORY (TOPIC 330): INVENTORY finalizing the valuation of the acquired assets and assumed liabilities. Goodwill increased by $149, while current In July 2015, the FASB issued ASU 2015-11, which requires assets decreased by $791 and current liabilities increased an entity to measure inventory at the lower of cost or net by $145. There was no effect on current period earnings as realizable value, which consists of the estimated selling a result of the changes to the provisional amounts prices in the ordinary course of business, less reasonably recognized. predictable cost of completion, disposal, and The following table summarizes the final allocation of the transportation. For public entities, the updated guidance is purchase price to the estimated fair values of assets effective for fiscal years beginning after December 15, acquired and liabilities assumed at the date of the 2016, including interim periods within those fiscal years. acquisition, as well as the adjustments made during the The guidance is to be applied prospectively with earlier measurement period. application permitted as of the beginning of an interim or annual reporting period. The Company does not anticipate a material impact to the Company’s financial statements as a result of this change. 4. BUSINESS COMBINATIONS a. Acquisition of Prins Autogassystemen Holding B.V.

On December 2, 2014 ("the acquisition date"), the Company acquired 100% of the outstanding shares of Prins Autogassystemen Holding B.V. ("Prins") for a base purchase price of EUR 12,200 ($15,017). The Company paid cash of EUR 2,500 ($3,112) and assumed debt of EUR 9,700 ($11,905). The results of Prins's consolidated operations have been included since December 2, 2014. Prins is a world leader in the development of alternative fuel systems and provides cost-effective and innovative solutions for a wide range of engine types.

The Company recognized $342 of acquisition related costs in General and Administrative expense under the

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PRINS PURCHASE PRICE ALLOCATION PRO FORMA RESULTS

Preliminary Final The following unaudited supplemental pro forma Purchase Measurement Purchase Price Period Price information presents the consolidated financial results as Allocation Adjustments Allocation if the acquisition of Prins had occurred on January 1, 2013. Consideration allocated to This supplemental pro forma information has been Other tangible assets $ 13,138 $ (791) $ 12,347 prepared for comparative purposes and does not purport Property, plant and to be indicative of what would have occurred had the equipment 3,824 — 3,824 Intangible assets subject to acquisition been made on January 1, 2013, nor are they amortization over 5 years 3,024 — 3,024 indicative of any future results. Goodwill 3,221 149 3,370 Total assets acquired $ 23,207 $ (642) $ 22,565 PRINS PRO FORMA RESULTS Years ended Dec 31 Less 2014 2013 Current liabilities $ 7,211 $ 145 $ 7,356 Deferred income tax Revenue liabilities 979 — 979 Revenue for the period $ 130,569 $ 164,032 Debt assumed 11,905 — 11,905 Add: BAF [note 4(b)] — 7,249 $ 20,095 $ 145 $ 20,240 Add: Prins 30,993 30,885 Pro forma revenue for the period $ 161,562 $ 202,166 Total net assets acquired $ 3,112 $ (787) $ 2,325 Net Loss Consideration Net loss for the period $ (149,619) $ (185,410) Paid to sellers $ 3,112 $ (787) $ 2,325 Add: BAF [note 4(b)] — (4,038) Add: Prins 91 (1,381) INTANGIBLE ASSETS Pro forma net loss for the period $ (149,528) $ (190,829)

The fair value of intangible assets is $3,024 and is assigned These amounts have been calculated after applying the to customer relationships. The intangible assets are being Company’s accounting policies and adjusting the results of amortized over their estimated useful life of five years. Prins to reflect the additional depreciation and amortization that would have been charged assuming the INVENTORY fair value adjustments to property, plant and equipment and intangible assets had been applied on January 1, 2013, The fair value of $4,975 assigned to inventory was based together with the consequential tax effects. on estimated selling prices and selling costs associated with the inventory. b. Acquisition of BAF Technologies

GOODWILL On June 28, 2013 (“the acquisition date”), the Of the total consideration paid, $3,370 (measured at the Company acquired 100% of the outstanding common December 31, 2014 EURO/USD exchange rate) has been shares of BAF Technologies ("BAF") and its subsidiary, allocated to goodwill. The entire goodwill recognized is ServoTech Engineering, Inc. (“ServoTech”) from Clean assigned to the Westport Operations and is not deductible Energy Fuels Corp. (“Clean Energy”). The results of for tax purposes. BAF’s consolidated operations have been included since July 1, 2013 in these consolidated financial statements in LAND AND BUILDING the Westport Operations segment. BAF is a natural gas vehicle business that supports customers with vehicle The fair value of $3,824 assigned to land and building was conversions under Ford’s Qualified Vehicle Modifier based on valuations of similar buildings in the area and (“QVM”) program. ServoTech is an engineering company will be amortized over its estimated useful life of 15 years. that provides a total engineering solution from initial The consolidated financial statements reflect consolidated concept phase to prototype hardware and validation. revenue and net loss for Prins of $1,196 and $(301), Pursuant to the Stock Purchase Agreement, the acquisition respectively, from December 2, 2014 to December 31, was settled with 816,460 of the Company’s common 2014.

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shares. The number of shares transferred was determined BAF FAIR MARKET VALUATION using the 10-day volume weighted average price Consideration allocated to ("VWAP") per share prior to and including the acquisition date ($30.62 per share). Of the 816,460 common shares, Other tangible assets, including cash of $1,178 $ 9,116 718,485 shares, with a fair value of $24,091, were issued Property, plant and equipment 905 on the acquisition date and 97,975 shares (“Holdback Intangible assets subject to amortization over 3–10 yrs 7,729 shares”), with a fair value of $3,285, were issued. The fair Goodwill 18,542 value of the shares transferred or to be transferred was determined by the closing share price on the acquisition Total assets acquired 36,292 date ($33.53 per share). Less: Total liabilities (6,594) Total net assets acquired $ 29,698 As part of the business acquisition, the Company entered Consideration into a marketing agreement (“Marketing Agreement”) Payable to Clean Energy $ 2,322 with Clean Energy, effective on the acquisition date for a Common shares issued 24,091 period of two years. The Company was required to make a Common shares to be issued 3,285 cash payment of $5,000 to Clean Energy in March 2014. $ 29,698 Under the terms of the Marketing Agreement, Clean Energy will provide products and services to the Company. The Company recognized $493 of acquisition related costs The products and services received pursuant to the in General and Administrative expense under the Marketing Agreement have been accounted for as a Corporate and Technology Investments segment during separate transaction from the business combination and the year ended December 31, 2013. the Company has determined the fair value of these INTANGIBLE ASSETS products and services to be $2,678. The fair value has been allocated to the products and services and will be The fair values for specifically identifiable intangible assets recognized when the goods are received and services by major asset class are as set forth below. performed. The fair value of the products and services of the Marketing Agreement was determined using Level 1 BAF INTANGIBLE ASSETS and Level 2 inputs. Assigned Weighted average fair value amortization period The excess of the consideration payable of $5,000 and the Customer relationships $ 6,350 8 years fair value of the goods and services to be received separate Core technology 160 10 years from the business combination of $2,322 has been Other intangibles 1,219 3 years included as purchase consideration for the acquisition of Total $ 7,729 7 years BAF. INVENTORY The following table summarizes management’s final fair market valuation of the assets acquired and liabilities The fair value of $5,792 assigned to inventory was based assumed at the acquisition date based on the results of a on assumptions about the selling prices and selling costs valuation report issued by a third-party valuation firm. associated with the inventory. DEFERRED INCOME TAXES

The Company recognized a deferred income tax liability of $296 relating to the difference in book and tax bases of acquired assets. GOODWILL

Of the total consideration paid, $18,542 has been allocated to goodwill. The entire goodwill amount recognized is assigned to the Westport Operations segment. The goodwill recognized is attributable primarily realizing

52 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » NOTES » 4. BUSINESS COMBINATIONS expected synergies that are specific to the Company’s During the year ended December 31, 2015, the Company business. The goodwill is not deductible for tax purposes. recorded write-downs to net realizable value of approximately $8,743 (year ended December 31, 2014 - The consolidated financial statements reflect consolidated $2,102; year ended December 31, 2013 - $4,925). revenue and net loss for BAF of $17,097 and $3,512, respectively, from June 28, 2013 to December 31, 2013. 7. LONG-TERM INVESTMENTS PRO FORMA RESULTS LONG-TERM INVESTMENTS The following unaudited supplemental pro forma Dec 31, 2015 Dec 31, 2014 information presents the consolidated financial results as Weichai Westport Inc. (a) $ 19,065 $ 18,791 if the acquisition of BAF had occurred on January 1, 2012. Cummins Westport Inc. (b) 10,731 13,196 This supplemental pro forma information has been Other equity accounted investees 1,315 1,337 prepared for comparative purposes and does not purport Total long-term investments $ 31,111 $ 33,324 to be indicative of what would have occurred had the acquisition been made on January 1, 2012, nor are they indicative of any future results. a. Weichai Westport Inc. On July 3, 2010, the Company invested $4,316 under an BAF PRO FORMA RESULTS agreement with Weichai Holding Group Co. Ltd. and Hong Years ended Dec 31 Kong Peterson (CNG) Equipment Ltd. to form Weichai 2013 2012 Westport Inc. (“WWI”). On October 11, 2011, the Revenue $ 171,281 $ 181,972 Company invested an additional $955 in WWI. The Net loss $ (189,448) $ (100,946) Company has a 35% equity interest in WWI.

These amounts have been calculated after applying the For the year ended December 31, 2015, the Company Company’s accounting policies and adjusting the results of recognized its share of WWI’s income of $1,044 (year BAF to reflect the additional depreciation and amortization ended December 31, 2014 - $6,027; year ended that would have been charged assuming the fair value December 31, 2013 - $4,264), as income from investment adjustments to property, plant and equipment and accounted for by the equity method. intangible assets had been applied on January 1, 2012, Assets, liabilities, revenue and expenses of WWI as of and together with the consequential tax effects. for the years presented are as follows:

5. ACCOUNTS RECEIVABLE WWI ASSETS & LIABILITIES Dec 31, 2015 Dec 31, 2014 ACCOUNTS RECEIVABLE Dec 31, 2015 Dec 31, 2014 Current assets Customer trade receivable $ 35,517 $ 43,256 Cash and short-term investments $ 4,898 $ 11,734 Due from joint venture [note 20] 1,165 2,538 Accounts receivable 67,302 72,121 Other receivables 3,617 3,307 Inventory 38,267 83,594 Income tax receivable 1,047 499 Other current assets 729 1,249 Allowance for doubtful accounts (3,022) (2,751) Long-term assets Total $ 38,324 $ 46,849 Property, plant and equipment 6,401 5,736 Deferred income tax assets 6,611 7,781 6. INVENTORIES Other long-term assets $ 1,516 $ — Total assets 125,724 182,215 INVENTORIES Current liabilities Dec 31, 2015 Dec 31, 2014 Accounts payable and Purchased parts $ 20,864 $ 28,227 accrued liabilities $ 71,162 $ 128,838 Work-in-process 3,485 4,879 Total liabilities $ 71,162 $ 128,838 Finished goods 11,311 8,718 Total $ 35,660 $ 41,824

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WWI REVENUES & EXPENSES For the year ended December 31, 2015, the Company Years ended Dec 31 recognized its share of CWI’s income of $17,105 (year 2015 2014 2013 ended December 31, 2014 - $8,136; year ended Product revenue $ 185,967 $ 618,465 $ 466,580 December 31, 2013 - $9,433), as income from investment accounted for by the equity method. Cost of revenue & expenses Cost of product revenue 164,581 565,943 429,238 During the first quarter of 2015, the Company identified Operating expenses 17,602 32,227 22,846 adjustments in CWI's estimated 2014 financial results, 182,183 598,170 452,084 which primarily related to warranty accrual. The identified adjustments resulted in a cumulative $1,184 Income before income taxes 3,784 20,295 14,496 understatement of the Company’s income from Income tax expense 844 3,076 2,315 investments accounted for by the equity method for the Income for the year $ 2,940 $ 17,219 $ 12,181 year ended December 31, 2014. The Company corrected the amounts related to CWI in the first quarter of 2015, b. Cummins Westport Inc. which had the net effect of increasing income from The Company entered into a joint venture with Cummins investments accounted for by the equity method by $1,184 on March 7, 2001. On December 16, 2003, the Company for the year ended December 31, 2015. The Company did and Cummins amended the joint venture agreement not believe this adjustment was material to its (“JVA”) focusing CWI on developing markets for consolidated financial statements for the year ended alternative fuel engines. In addition, the two companies December 31, 2014 and, therefore, did not restate any prior signed a Technology Partnership Agreement that creates a period amounts. The Company does not believe the flexible arrangement for future technology development adjustment is material to the year ended December 31, between Cummins and the Company. 2015 consolidated financial statements.

On February 20, 2012, the JVA was amended and restated Assets, liabilities, revenue and expenses of CWI are as to provide for, among other things, clarification concerning follows: the scope of products within CWI. In addition, the parties have revised certain economic terms of the JVA. CWI ASSETS & LIABILITIES Dec 31, 2015 Dec 31, 2014 The joint venture has a term of ten years from the date of Current assets the JVA and can be terminated under certain Cash and short-term investments 114,053 107,415 circumstances before the end of the term, including in the Accounts receivable 4,632 12,741 event of a material breach of the agreement by, or in the Current portion of deferred income tax assets 18,990 21,967 event of a change of control of one of the parties. Other current assets 287 116

Prior to February 20, 2012, the Company and Cummins Long-term assets shared equally in the profits and losses of CWI. Under the Property, plant and equipment 1,212 1,294 new JVA, profits and losses are shared equally up to an Deferred income tax assets 32,015 29,408 established revenue baseline, then any excess profit will be Total assets $ 171,189 $ 172,941 allocated 75% to the Company and 25% to Cummins. Current liabilities The Company has determined that CWI is a variable interest Current portion of warranty liability $ 37,313 $ 48,818 entity ("VIE"). Cummins and Westport each own 50% of the Current portion of deferred revenue 13,858 8,029 common shares of CWI and have equal representation on the Accounts payable & accrued liabilities 11,852 6,419 Board of Directors. No one shareholder has the unilateral 63,023 63,266 power to govern CWI. The Board of Directors has power over Long-term liabilities the operating decisions and to direct other activities of CWI Warranty liability 37,963 43,983 that most significantly impact CWI’s economic performance Deferred revenue 45,859 34,345 as set forth in the governing documents. As decision-making Other long-term liabilities 2,908 2,771 at the Board of Directors’ level requires unanimous approval, 86,730 81,099 this power is shared. Accordingly neither party is the primary Total liabilities $ 149,753 $ 144,365 beneficiary.

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CWI REVENUES & EXPENSES The carrying amount and maximum exposure to losses Years ended Dec 31 relating to VIEs in which the Company holds a significant 2015 2014 2013 variable interest but is not the primary beneficiary, and Product revenue $ 274,033 $ 283,551 $ 261,012 which have not been consolidated, were as follows: Parts revenue 57,849 53,683 49,639 Balance at Dec 31 331,882 337,234 310,651 2015 2014 Cost of revenue & Maximum Maximum Carrying exposure Carrying exposure expenses amount to loss amount to loss Cost of product and parts Equity method investment $ 10,731 $ 10,731 $ 13,196 $ 13,196 revenue 228,058 270,832 246,403 Accounts receivable 1,165 1,165 2,538 2,538 Research and development 30,165 21,131 21,522 General and administrative 1,414 1,202 1,348 Sales and marketing 21,236 22,514 17,839 9. PROPERTY, PLANT & Foreign exchange (gain) loss 28 34 (7) Bank charges, interest & other 817 805 607 EQUIPMENT 281,718 316,518 287,712 PROPERTY, PLANT & EQUIPMENT Income from operations 50,164 20,716 22,939 Accumulated Net book Cost depreciation value Interest and investment income 367 260 117 December 31, 2015 Income before income taxes 50,531 20,976 23,056 Land and buildings $ 2,706 $ 165 $ 2,541 Income tax expense Computer equipment and (recovery) software 7,171 6,234 937 Current 19,785 21,514 24,600 Furniture and fixtures 5,163 2,084 3,079 Deferred (648) (15,719) (18,566) Machinery and equipment 70,415 36,739 33,676 19,137 5,795 6,034 Leasehold improvements 10,394 8,100 2,294 Income for the year $ 31,394 $ 15,181 $ 17,022 Total 2015 $ 95,849 $ 53,322 $ 42,527

December 31, 2014 8. VARIABLE INTEREST ENTITY Land and buildings $ 3,015 $ — $ 3,015 Computer equipment and Cummins and Westport each own 50% of the common software 9,277 7,063 2,214 shares of CWI and have equal representation on the Board Furniture and fixtures 6,194 1,798 4,396 Machinery and equipment 81,933 36,135 45,798 of Directors. No one shareholder has the unilateral power Leasehold improvements 12,460 9,749 2,711 to govern CWI. The Board of Directors has power over the Total 2014 $ 112,879 $ 54,745 $ 58,134 operating decisions and to direct other activities of CWI that most significantly impact CWI’s economic The Company reviews its long-lived assets for impairment performance as set forth in the governing documents. As including property, plant and equipment, and intangible decision-making at the Board of Directors’ level requires assets whenever events and changes in circumstances unanimous approval, this power is shared. Accordingly, indicate that the carrying amount of the assets may not be neither party is the primary beneficiary. recoverable. Based on the revenue and operating results The Company has not historically provided and does not and decline in the oil price, the Company concluded there intend to provide financial or other support to CWI that were impairment indicators requiring the performance of a the Company is not contractually required to provide. long-lived assets impairment test during the years ended December 31, 2015 and 2014.

During the year ended December 31, 2015, the Company recorded an impairment charge of $4,015. The impairment resulted primarily from the write-down of Orca LNG trailers ("Orcas") which provide in-yard fleets convenient refueling in the absence of a permanent liquefied natural gas ("LNG") solution. The method used to determine fair value was recent sales of Orcas and the

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impairment charge was recorded in the Westport During the year ended December 31, 2015, amortization of Operations segment. $2,951 (December 31, 2014 - $4,560; year ended December 31, 2013 - $4,042) was recognized in the During the year ended December 31, 2014, the Company statement of operations. recorded an impairment charge of $5,238. The impairment was primarily recorded against non-utilized The expected amortization of intangible assets for fiscal test cells, and non-utilized equipment related to facility 2016 to 2020 is $2,526 per year. closures.

Depreciation expense for the year ended December 31, 11. GOODWILL 2015 was $10,703 (year ended December 31, 2014 - A continuity of goodwill is as follows: $14,106; year ended December 31, 2013 - $12,246).

GOODWILL 10. INTANGIBLE ASSETS Dec 31, 2015 Dec 31, 2014 Balance, beginning of period: $ 23,352 $ 41,500 INTANGIBLE ASSETS Acquisition of Prins [note 4(a)] — 3,221 Accumulated Net book Measurement period adjustments Cost depreciation value [note 4(a)] 149 — Impairment losses (18,707) (18,543) December 31, 2015 Impact of foreign exchange changes (1,786) (2,826) Patents and trademarks $ 16,964 $ 4,094 $ 12,870 Balance, end of period $ 3,008 $ 23,352 Technology 4,862 2,663 2,199 Customer contracts 12,025 4,952 7,073 Goodwill is subject to assessment for impairment by Other intangibles 283 118 165 applying a fair-value based test on an annual basis or more Total 2015 $ 34,134 $ 11,827 $ 22,307 frequently if circumstances indicate a potential impairment. The Company's annual assessment date is December 31, 2014 November 30. However, based on the revenue and Patents and trademarks $ 18,425 $ 3,445 $ 14,980 Technology (1) 6,449 3,142 3,307 operating results of the Italian reporting unit, which is Customer contracts (1) 13,762 4,163 9,599 within the Westport Operations segment in the nine Other intangibles (1) 62 28 34 months ended September 30, 2015, the decline in the Total 2014 $ 38,698 $ 10,778 $ 27,920 outlook for the remainder of 2015 and future years and the decline in the Company's share price, the Company 1. The Company reviews its long-lived assets for impairment including property, plant and equipment, and intangible assets concluded there were impairment indicators requiring an whenever events and changes in circumstances indicate that interim goodwill impairment assessment as of September the carrying amount of the assets may not be recoverable. Based on the revenue and operating results and decline in the 30, 2015. Based on the Company's assessment, it was oil price, the Company concluded there were impairment determined that the carrying amount of goodwill exceeded indicators requiring the performance of a long-lived assets impairment test for customer contracts, technology and other the implied fair value of goodwill and as a result an intangibles as of November 30, 2014. Accordingly non-cash impairment of $18,707 was recorded in the Italian impairment charges aggregating to $5,823 were recorded during the year ended December 31, 2014 which reduced the reporting unit. carrying values of technology by $115, customer contracts by $4,705 and other intangibles by $1,003 for the Westport The remaining goodwill of $3,008 relates to the Operations segment. Netherlands reporting unit, which is also within the Based on the revenue and operating results and decline in Westport Operations segment. The Company completed its the oil price, the Company concluded there were annual assessment at November 30, 2015 and concluded impairment indicators requiring the performance of a that the goodwill was not impaired. long-lived assets impairment test for customer contracts, An assessment of the carrying value of goodwill was technology and other intangibles as of November 30, 2015. previously conducted as of November 30, 2014. Based on The Company completed its annual assessment at the Company's assessment, it was determined that November 30, 2015 and concluded that intangible assets carrying amount of goodwill exceeded the implied fair were not impaired. value of goodwill and as a result an impairment of $18,543 was recorded in the US reporting unit, which is within the

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Westport Operations segment for the year ended per annum, payable in cash semi-annually in arrears on December 31, 2014. March 15 and September 15 of each year during the term, which commenced on March 15, 2012. The Initial For 2014 and 2015, the fair value of the reporting units was Debentures were redeemable at the option of the Company determined using the present value of expected future cash at a price equal to CDN$1,150 per CDN$1,000 principal flows discounted at a rate equivalent to a market amount of the debentures on or before March 22, 2013. participant’s weighted-average cost of capital. The After March 22, 2013 and before maturity, the debentures estimates and assumptions regarding expected future cash were redeemedable at a price equal to CDN$1,100 per CDN flows and the appropriate discount rates are in part based $1,000 principal amount. upon historical experience, financial forecasts and industry trends and conditions. On June 27, 2014, the Company raised CDN$19,000 through the issuance of debentures to Richardson GMP 12. ACCOUNTS PAYABLE & Limited (“RGMP”), formerly Macquarie Private Wealth Inc. on a private placement basis (the “Additional ACCRUED LIABILITIES Debentures”). In conjunction with the issuance of the Additional Debentures, the Company amended the terms ACCOUNTS PAYABLE & ACCRUED LIABILITIES of the Initial Debentures (the “Amended Initial Dec 31, 2015 Dec 31, 2014 Debentures”). The Amended Initial Debentures are Trade accounts payable $ 42,851 $ 41,796 ranked pari passu with the Additional Debentures and Accrued payroll 3,839 5,270 both shall be treated as the same series of debentures (the Accrued interest 1,037 1,237 Taxes payable 2,014 580 “New Debentures”) with the same terms. The New Other payables [note 22(b)] 7,713 6,619 Debentures totaling CDN$55,000 are composed of the Total $ 57,454 $ 55,502 Additional Debentures CDN$19,000 and the Amended Initial Debentures CDN$36,000. The New Debentures are unsecured and subordinated to senior indebtedness, 13. LONG-TERM DEBT mature on September 15, 2017, and bear interest at 9% per annum, payable in cash semi-annually in arrears on March LONG-TERM DEBT 15 and September 15 of each year during the term. The Dec 31, 2015 Dec 31, 2014 (1) New Debentures are redeemable at the option of the Subordinated debenture notes (a) $ 38,359 $ 44,645 Company at a price equal to CDN$1,150 per CDN$1,000 Senior financing (b) 9,123 15,910 principal amount of the debentures after September 15, Senior revolving financing (c) 10,859 12,101 2015 and on or before March 15, 2016. After March 15, Other bank financing (d) 3,312 2,646 2016 and before maturity, the debentures can be redeemed Capital lease obligations (e) 794 1,394 at a price equal to CDN$1,100 per CDN$1,000 principal 62,447 76,696 amount. Current portion (8,257) (18,955) Total $ 54,190 $ 57,741 The New Debentures contain an extension option that will allow each debenture holder to have the option to extend, a 1. We adopted ASU 2015-03 in the fourth quarter of 2015. We applied the change retrospectively to January 1, 2014 for prior maximum of six times, the maturity date for an additional period balances of unamortized debt issuance costs, resulting period of six months provided that greater than CDN in a $1,486 (CDN$1,964) reduction in other assets and long-term debt on our consolidated balance sheet as of December 31, $10,000 of the aggregate principal amount of the New 2014. Debentures remain outstanding. a. Subordinated Debenture Notes The Company has performed the assessment of embedded derivatives within the New Debentures and concluded that On September 23, 2011, the Company raised CDN $36,000 there is an embedded derivative that requires bifurcation through the issuance of debentures to Macquarie Private related to the extension option from the New Debentures. Wealth Inc. (“Macquarie”) on a private placement basis The extension option was deemed not clearly and closely (the “Initial Debentures”). The Initial Debentures were related to the New Debentures and is separately accounted unsecured and subordinated to senior indebtedness, for as a standalone derivative. The Company recorded this matured on September 22, 2014, and bore interest at 9% embedded derivative as a non-current liability on its

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 57 FINANCIAL STATEMENTS » NOTES » 13. LONG-TERM DEBT

consolidated balance sheet. At issuance on June 27, 2014, 3. The Prins senior mortgage loan is denominated in Euros and was assumed on the acquisition of Prins [note 4(a)]. The senior the embedded derivative’s fair value was determined to be mortgage loan bears interest at 3-month Euribor plus 1% (1.1% CDN$1,249, which was recorded as a reduction to the as at December 31, 2015). Interest is paid quarterly. The carrying value of the New Debentures. The Company is Company has pledged its interest in Prins's building as a general guarantee for its senior mortgage loan. The senior mortgage accreting the carrying value of the debt to interest expense loan matures in 2020. by using the effective interest method through to the maturity date of the New Debentures. The embedded c. Senior Revolving Financing derivative is subsequently adjusted to fair value at each The senior revolving financing facility is denominated in reporting date, with the associated fair value loss (gain) Euros and bears interest at the 6-month Euribor plus 2.6% recorded in interest and other income (loss). The (2.7% as at December 31, 2015) and will be repaid through derivative liability is included in other long term liabilities one principal payment of €10,000 on March 31, 2017. on the consolidated balance sheets. The Company Interest is paid semi-annually. The Company has pledged determined the fair value of the embedded derivative using its interest in Emer as a general guarantee for its senior the Interest Rate Option Pricing Method which revolving financing. incorporated the Black-Karasinski model. Throughout the entire term of these financing The table below discloses the accounting values assigned to arrangements, the Company is required to meet certain the subordinated debenture notes. All values are disclosed financial and non-financial covenants. As of December 31, in CDN ("C$"). The approximate exchange rate used to 2015, the Company is in compliance with all covenants value the subordinated debenture notes to USD at under the financing arrangements. December 31, 2015 was 0.72 (2014 - 0.86). The principal repayment schedule of the senior financings SUBORDINATED DEBENTURE NOTES ACCOUNTING VALUES are as follows for the years ended December 31: (values in Canadian dollars) Dec 31, 2015 Dec 31, 2014 Balance, beginning of period C$ 51,970 C$ 34,036 SENIOR REVOLVING FINANCING Issuance of Additional Debentures — 19,000 Subordinated Senior financing Prins Senior Senior Extension Option Discount — (1,249) debenture Mortgage revolving notes Emer Prins Loan financing Total Accretion for extension option 395 183 2016 $ — $3,796 $1,955 $ 326 $ — $ 6,077 Accretion of share issuance costs 724 — 2017 38,359 1,011 81 326 10,859 50,636 Balance, end of period C$ 53,089 C$ 51,970 2018 — — — 326 — 326 2019 — — — 325 — 325 b. Senior Financing 2020+ — — — 977 — 977 $ 38,359 $4,807 $2,036 $ 2,280 $ 10,859 $58,341 SENIOR FINANCING Dec 31, 2015 Dec 31, 2014 Emer Senior Financing (1) $ 4,807 $ 9,376 d. Other Bank Financing Prins Senior Financing (2) 2,036 3,630 Prins Senior Mortgage Loan (3) 2,280 2,904 OTHER BANK FINANCING Total $ 9,123 $ 15,910 Dec 31, 2015 Dec 31, 2014 Emer other financing (1) $ 2,019 $ 1,129 1. The Emer S.p.A ("Emer") senior financing agreement is (2) denominated in Euros, bears interest at the 6-month Euribor Prins other financing 1,269 1,424 plus 2.5% (2.6% as at December 31, 2015) and is recorded at Other financing 24 93 amortized cost using the effective interest rate method. Interest Total $ 3,312 $ 2,646 is paid semi-annually. The Company has pledged its interest in Emer as a general guarantee for its senior financing. The senior 1. Emer other financing consists of various unsecured bank financing matures in 2017. financing arrangements that carry rates of interest ranging from 2. A total of $7,521 Prins senior financing is denominated in Euros 1.01% to 2.90% (2014 - 1.01%% to 2.90%%) and are payable on and was assumed on the acquisition of Prins [note 4(a)]. maturity dates ranging from June 23, 2015 to June 23, 2017. Principal of $3,891 was repaid on December 2, 2014. Additional 2. Prins other bank financing consists of a credit facility for principal has been repaid in 2015. The senior financing maximum borrowings of €2,000. The credit facility bears interest agreement bears interest at the 3-month Euribor plus 3.5% (3.6% at the 3 month Euribor +3.5% (3.6% as of December 31, 2015). as at December 31, 2015). Interest is paid quarterly. The The credit facility is governed by an accounts receivable list Company has pledged its interest in Prins as a general requirement limiting such borrowings to 60% of accepted guarantee for its senior financing. The senior financing matures accounts receivable. in 2016.

58 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » NOTES » 13. LONG-TERM DEBT e. Capital Lease Obligations 15. OTHER LONG-TERM The Company has capital lease obligations that have initial LIABILITIES terms of three to five years at interest rates ranging from 3.1% to 4.9% (2014 - 3.1%% to 4.9%). The capital lease OTHER LONG TERM LIABILITIES obligations require the following minimum annual Dec 31, 2015 Dec 31, 2014 principal payments during the respective fiscal years: Severance indemnity (a) $ 1,230 $ 1,519 Contingent consideration payable The capital lease obligations are as follows: related to AFV acquisition (b) — 1,240 Derivative Liability [note 13(a)] 72 86 $ 1,302 $ 2,845 CAPITAL LEASE OBLIGATIONS Current portion 2016 $ 369 (included in accounts payable and accrued liabilities, other payables) — (1,240) 2017 256 Total $ 1,302 $ 1,605 2018 148 2019 21 2020 — a. Severance Indemnity Total $ 794 Italian law requires companies to make a mandatory termination payment to employees. It is paid, as a lump 14. WARRANTY LIABILITY sum, when the employment ends for any reason such as retirement, resignation or layoff. The severance indemnity A continuity of the warranty liability is as follows: liability is calculated in accordance with local civil and labour laws based on each employee’s length of service, WARRANTY LIABILITY employment category and remuneration. There is no Years ended Dec 31 vesting period or funding requirement associated with the 2015 2014 2013 liability. The liability recorded in the consolidated balance Balance, beginning of period $ 23,109 $ 28,845 $ 6,380 sheet is the amount that the employee would be entitled to Warranty assumed on acquisition — 1,952 582 Warranty claims (9,438) (10,709) (5,397) if the employee terminates immediately. This liability for Warranty accruals 427 2,734 4,153 severance indemnities relates primarily to the Company’s Change in estimate — — 22,837 employees in Italy. Impact of foreign exchange changes (107) 287 290 b. Contingent Consideration Balance, end of period $ 13,991 $ 23,109 $ 28,845 Payable Related to AFV Less: Current portion (5,554) (9,696) (9,955) Long-term portion $ 8,437 $ 13,413 $ 18,890 Acquisition The total purchase price to acquire AFV included earn-out During the fourth quarter of 2013, a study of the historical payments payable in the Company’s shares and tied to data indicated that the cost to repair product defects revenue and production milestones to be achieved no later continued to increase significantly primarily associated than December 31, 2014. This contingent consideration with our extended warranty contracts. As a result, the had a fair value of $407 as at December 31, 2014. Company recognized a change in estimate in our base warranty liability and a loss on our extended warranty The Company recorded compensation expense relating to contracts representing the excess of the estimated cost to two employees of AFV who received earn-out payments in service these contracts over the amount of the deferred the Company’s shares. This contingent consideration had a revenue recognized associated with the contracts. fair value of $833 as at December 31, 2014.

During the year ended December 31, 2015, 325,073 shares were issued in connection with the earn-out payments described above at CDN $4.51 per share.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 59 FINANCIAL STATEMENTS » NOTES » 16. GOVERNMENT ASSISTANCE

16. GOVERNMENT shareholders increased the number of common shares reserved for issuance under the Omnibus Plan by ASSISTANCE 1,900,000.

From time to time, the Company enters into agreements The Executive and Senior Management Compensation for financial assistance with government agencies. During Program sets out provisions where the RSUs and PSUs the years ended December 31, 2015, 2014 and 2013, (together the “Units”) will be granted to the Company’s government assistance of $215, $892 and $640 was executive management if performance milestones are received or receivable by the Company, respectively, which achieved as determined at the discretion of the Human has been recorded as a reduction of the related research Resources and Compensation Committee of the Company’s and development expenditures [Note 18]. Board of Directors. These performance milestones are Under the terms of an agreement with the Industry focused on achievement of key cash management, Canada’s Industrial Technologies Office (“ITO”), from profitability and revenue growth objectives. Vesting April 1, 2008 to March 31, 2015, inclusively, the Company periods and conditions for each Unit granted pursuant to is obligated to incur annual royalties equal to the greater of the Westport Omnibus Plan are at the discretion of the $1,164 (CDN$1,350) or 0.33%% of the Company’s annual Board of Directors and may include time based, share price revenue provided that gross revenue exceeds $11,638 or other performance targets. (CDN$13,500) in any of the aforementioned fiscal years. The royalty payment period may be extended until the a. Stock Options earlier of March 31, 2018 or until cumulative royalties total The Company grants incentive stock options to employees, $24,389 (CDN$28,200). For the year ended December 31, directors, officers and consultants. Stock options are 2015 $285 (December 31, 2014 - $1,481) in royalties were granted with an exercise price of not less than the market paid. As at December 31, 2015 $2,387 remains accrued in price of the Company’s common shares on the date accounts payable and accrued liabilities (December 31, immediately prior to the date of grant. The exercise period 2014 - $1,269). As at December 31, 2015, cumulative of the options may not exceed eight years from the date of royalties of CDN$10,014 have been paid. grant. Vesting periods of the options are at the discretion of the Board of Directors and may be based on fixed terms, 17. SHARE CAPITAL, STOCK achieving performance milestones or reaching specified OPTIONS & OTHER STOCK- share price targets. BASED PLANS A summary of the status of the Company’s stock option plan as of December 31, 2015, December 31, 2014 and During the year ended December 31, 2015, the Company December 31, 2013 and changes during the periods then issued 900,097 common shares, net of cancellations, upon ended are presented as follows: exercises of share units and in connection with earn out payments [Note 15(b)], (year ended December 31, 2014 – STOCK OPTION PLAN SUMMARY 652,046 common shares; year ended December 31, 2013 – (stock option values Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 expressed in Canadian 721,186 common shares). The Company issues shares from dollars) # WAEP # WAEP # WAEP treasury to satisfy stock option and share unit exercises. Outstanding, beginning of period 32,223 $ 17.64 816,450 $30.20 996,047 $27.78 At the Company's 2012 annual general meeting, the Granted — — — — — — Exercised — — (43,071) 6.17 (111,986) 6.80 Company’s shareholders ratified and approved the Forfeited / Expired (23,653) 18.63 (741,156) 33.82 (67,611) 33.72 Westport Omnibus Plan and reserved 8,000,000 common Outstanding, shares under this plan. Under the Westport Omnibus Plan, end of period 8,570 $14.90 32,223 $17.64 816,450 $30.20 stock options, Restricted Share Units (“RSUs”) and Options exercisable, Performance Share Units (“PSUs”) may be granted and end of period 8,570 $14.90 32,223 $17.64 305,506 $24.15 are exercisable into common shares of the Company for no WAEP = weighted average exercise price (C$) additional consideration. Any employee, contractor, During the year ended December 31, 2015, the Company director or executive officer of the Company is eligible to recognized $nil (year ended December 31, 2014 - $1,764; participate in the Westport Omnibus Plan. During the year ended December 31, 2015 the Company's

60 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » NOTES » 17. SHARE CAPITAL, STOCK OPTIONS & OTHER STOCK-BASED PLANS year ended December 31, 2013 - $2,094) in stock-based future performance and other conditions tied to the payout compensation related to stock options. of the PSU. The vesting of the 2,695,000 PSU's granted in 2015 is conditional upon Shareholders of Westport No stock options were granted during the year ended approving an increase in the number of awards available December 31, 2015 or the year ended December 31, 2014. for issuance pursuant to the Westport Omnibus Plan. As a b. Share Units result these PSU's are being treated as a liability until this condition is met. The value assigned to issued Units and the amounts As at December 31, 2015, $25,496 of compensation cost accrued are recorded as other equity instruments. As Units related to Units awards has yet to be recognized in results are exercised or vest and the underlying shares are issued from operations and will be recognized over a weighted from treasury of the Company, the value is reclassified to average period of 2.0 years. share capital.

During the year ended December 31, 2015, the Company c. Aggregate Intrinsic Values recognized $14,871 (year ended December 31, 2014 - The aggregate intrinsic value of the Company’s share units $7,919; year ended December 31, 2013 - $12,189) of stock- at December 31, 2015 and 2014 are as follows: based compensation associated with the Westport Omnibus Plan and the former Amended and Restated Unit AGGREGATE INTRINSIC VALUES OF SHARE UNITS Plan. (values in CDN$) Dec 31, 2015 Dec 31, 2014 A continuity of the Units issued under the Westport Outstanding $ 26,849 $ 23,433 Omnibus Plan and the former Amended and Restated Unit Exercisable 3,198 624 Plan as of December 31, 2015, December 31, 2014 and Exercised 1,599 7,238 December 31, 2013 are as follows: d. Stock-based Compensation SHARE UNIT PLAN SUMMARY Stock-based compensation associated with the Unit plans (share values Dec 31, 2015 Dec 31, 2014 Dec 31, 2013 expressed in Canadian dollars) # WAGF # WAGF # WAGF and the stock option plan is included in operating expenses Outstanding, as follows: beginning of year 5,337,873 $10.27 1,200,591 $23.68 1,095,094 $20.68 Granted 5,556,630 6.74 5,792,162 10.54 742,140 30.21 STOCK-BASED COMPENSATION IN OPERATING EXPENSES Exercised / Years ended Dec 31 Vested (575,024) 11.49 (608,975) 19.52 (448,526) 24.44 Forfeited / 2015 2014 2013 Expired (661,558) 10.34 (1,045,905) 21.75 (188,117) 29.80 Research and development $ 9,915 $ 1,749 $ 2,195 Outstanding, General and administrative 2,224 5,884 10,201 end of year 9,657,921 $ 7.62 5,337,873 $10.27 1,200,591 $23.68 Sales and marketing 2,732 2,050 1,887 Units outstanding & Total $ 14,871 $ 9,683 $ 14,283 exercisable, end of period 1,150,294 $ 9.58 142,166 $11.67 224,638 $11.20 WAGF = weighted average grant date fair value ($C) 18. RESEARCH & During 2015, 5,556,630 (December 31, 2014 - 5,792,162) DEVELOPMENT EXPENSES share units were granted to employees. This included Research and development expenses are recorded net of 2,861,630 Restricted Share Units ("RSUs") (2014 - government assistance received or receivable. The research 4,820,763) and 2,695,000 Performance Share Units and development expenses had been incurred and program ("PSUs") (2014 - 971,399). Values of RSU awards are funding had been received or receivable are as follows: generally determined based on the fair market value of the underlying Common Share on the date of grant. RSUs RESEARCH & DEVELOPMENT EXPENSES typically vest over a three year period so the actual value Years ended Dec 31 received by the individual depends on the share price on 2015 2014 2013 the day such RSUs are settled for Common Shares, not the Research & development expenses $ 52,992 $ 77,472 $ 91,772 date of grant. PSU awards do not have a certain number of Government assistance [note 16] (215) (892) (640) Common Shares that will issue over time - it depends on Research & development $ 52,777 $ 76,580 $ 91,132

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 61 FINANCIAL STATEMENTS » NOTES » 19. INCOME TAXES

19. INCOME TAXES b. Deferred Income Tax a. Provision The significant components of the deferred income tax assets and liabilities are as follows: The Company’s income tax provision differs from that calculated by applying the combined enacted Canadian DEFERRED INCOME TAX ASSETS & LIABILITIES federal and provincial statutory income tax rate of 26% for Dec 31, 2015 Dec 31, 2014 the year ended December 31, 2015 (year ended Deferred income tax assets December 31, 2014 - 26%; year months ended Net loss carry forwards $ 129,653 $ 129,258 December 31, 2013 - 26%) as follows: Intangible assets 3,792 4,091 Property, plant and equipment 7,317 6,836 INCOME TAX PROVISION Financing and share issuance costs 712 1,533 Years ended Dec 31 Warranty liability 4,220 5,131 2015 2014 2013 Deferred revenue 849 1,416 Loss before income taxes $ (97,657) $(150,198) $(184,537) Inventory 2,206 2,336 Expected income tax recovery (25,381) (39,051) (47,979) Research and development 3,140 2,733 Increase (reduction) in Other 6,270 7,262 income taxes resulting from Total gross deferred income tax assets 158,159 160,596 Non-deductible stock-based Valuation allowance (153,099) (152,207) compensation 3,553 2,495 3,619 Total deferred income tax assets 5,060 8,389 Other permanent differences (76) (446) (2,562) Withholding taxes 1,429 969 590 Deferred income tax liabilities Foreign tax rate differences, Intangible assets (4,566) (6,386) foreign exchange and other adjustments (138) 7,409 3,858 Property, plant and equipment (1,177) (2,754) Non-taxable income from Other (349) (774) equity investment (4,512) (3,739) (2,851) Total deferred income tax liabilities (6,092) (9,914) Change in valuation allowance 21,036 25,784 37,391 Total net deferred income tax liabilities $ (1,032) $ (1,525) Goodwill impairment 4,820 4,748 8,807 Allocated as follows Change in uncertain tax position — 1,252 — Deferred income tax assets 2,538 3,827 Income tax expense (recovery) $ 731 $ (579) $ 873 Deferred income tax liabilities (3,570) (5,352) Total net deferred income tax liabilities $ (1,032) $ (1,525)

The valuation allowance is reviewed on a quarterly basis to determine if, based on all available evidence, it is more- likely-than-not that some or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent on the generation of sufficient taxable income during the future periods in which those temporary differences are expected to reverse. If the evidence does not exist that the deferred income tax assets will be fully realized, a valuation allowance has been provided.

The deferred income tax assets have been reduced by the uncertain tax position presented in [note 19(f)].

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The following is a summary of the changes in the deferred LOSS CARRY-FORWARDS income tax asset valuation allowance: Expiring in: 2016 2017 2018 2019 2020 2021+ Total Canada $ — $ — $ — $ — $ — $ 366,271 $ 366,271 DEFERRED INCOME TAX ASSET VALUATION ALLOWANCE Italy — — — — — 5,625 5,625 United States — — — — — 67,481 67,481 Year ended Dec 31 Sweden — — — — — 17,643 17,643 2015 2014 Other — — 1,038 6,432 4,946 6,398 18,814 Beginning balance $ 152,207 $ 126,424 Total $ — $ — $1,038 $6,432 $ 4,946 $ 463,418 $ 475,834 Additions 892 25,783 Reductions — — Ending valuation allowance $ 153,099 $ 152,207 e. Deferred Income Tax Liability

The Company has not recognized a deferred income tax c. Income Tax Expense / Recovery liability for the undistributed earnings of certain foreign The components of the Company’s income tax expense subsidiaries which are essentially investments in those (recovery) are as follows: foreign subsidiaries and are permanent in duration.

INCOME TAX EXPENSE (RECOVERY) f. Tax Reserves Net income (loss) before The Company records uncertain tax positions in income taxes Current Deferred Total accordance with ASC No. 740, Income Taxes. As at December 31, 2015, the total amount of the Company’s Year ended Dec 31, 2015 uncertain tax benefits was $1,230 (year ended December Canada $ (43,973) $ 793 $ 228 $ 1,021 31, 2014 - 1,230). If recognized in future periods, the United States (22,227) 9 — 9 uncertain tax benefits would affect our effective tax rate. Italy (20,695) 389 (566) (177) The Company files income tax returns in Canada, the U.S., Other (10,762) 54 (176) (122) Italy, and various other foreign jurisdictions. All taxation $ (97,657) $ 1,245 $ (514) $ 731 years remain open to examination by the Canada Revenue Year ended Dec 31, 2014 Agency, the 2009 to 2014 taxation years remain open to Canada $ (87,784) $ 165 $ 301 $ 466 examination by the Internal Revenue Service and the United States (49,577) 8 — 8 Italian Revenue Agency, and various years remain open in Italy (3,834) 521 (1,463) (942) the other foreign jurisdictions. Other (9,003) (88) (23) (111) A reconciliation of the change in the reserves for uncertain $ (150,198) $ 606 $ (1,185) $ (579) tax positions from January 1, 2015 to December 31, 2015 is Year ended Dec 31, 2013 as follows: Canada $ (99,188) $ 444 $ 89 $ 533 United States (31,019) 56 (295) (239) TAX RESERVES Italy (27,247) 836 (311) 525 Balance as of January 1, 2015 $ —

Other (27,083) 78 (24) 54 Tax positions related to the current year $ (184,537) $ 1,414 $ (541) $ 873 Additions — Reductions — d. Loss Carry-forwards $ — Tax positions related to prior years The Company has loss carry-forwards in the various tax Opening $ 1,230 jurisdictions available to offset future taxable income as Additions — follows: Reductions — Settlements — Lapses in statutes of limitations — Balance as of December 31, 2015 $ 1,230

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 63 FINANCIAL STATEMENTS » NOTES » 20. RELATED PARTY TRANSACTIONS

20. RELATED PARTY CONTRACTUAL COMMITMENTS 2016 $ 3,334 TRANSACTIONS 2017 3,246 Pursuant to the amended and restated JVA, Westport 2018 4,775 engages in transactions with CWI. 2019 5,080 2020 4,333 As at December 31, 2015, net amounts due from CWI total Thereafter 35,767 $1,165 (2014 - $3,621). Amounts receivable relate to costs Total $ 56,535 incurred by Westport on behalf of CWI. The amounts are generally reimbursed by CWI to Westport in the month For the year ended December 31, 2015, the Company following the month in which the payable is incurred. Cost incurred operating lease expense of $3,763 (year ended reimbursements from CWI consisted of the following: December 31, 2014 - $3,879; year ended December 31, 2013 - $5,675).

RELATED PARTY TRANSACTIONS The Company is a party to a variety of agreements in the Years ended Dec 31 ordinary course of business under which it is obligated to 2015 2014 2013 indemnify a third party with respect to certain matters. Research and development $ 18 $ 3 $ 178 Typically, these obligations arise as a result of contracts for General and administrative 906 1,548 1,351 sale of the Company’s product to customers where the Sales and marketing 4,818 4,935 4,725 Company provides indemnification against losses arising Total $ 5,742 $ 6,486 $ 6,254 from matters such as product liabilities. The potential impact on the Company’s financial results is not subject to 21. SERVICE AND OTHER reasonable estimation because considerable uncertainty REVENUE exists as to whether claims will be made and the final outcome of potential claims. To date, the Company has not Service and other revenue for the year ended December 31, incurred significant costs related to these types of 2015 consisted of other fee payments of $nil (year ended indemnifications. December 31, 2014 - $1,480; year ended December 31, The Company is engaged in certain legal actions in the 2013 - $1,484), and service revenue of $5,460 (year ended ordinary course or business and believes that the ultimate December 31, 2014 - $11,074; year ended December 31, outcome of these actions will not have a material adverse 2013 - $14,547) under existing development agreements. effect on our operating results, liquidity or financial All costs associated with the development agreements were position. recorded as research and development expenses in the period incurred. b. Purchase Commitments 22. COMMITMENTS & The Company purchases components from a variety of suppliers and contract manufacturers. During the normal CONTINGENCIES course of business, in order to manage manufacturing lead a. Contractual Commitments times and help ensure adequate component supply, the Company enters into agreements with suppliers and The Company has obligations under operating lease contract manufacturers. A portion of our reported arrangements that require the following minimum annual estimated purchase commitments arising from these payments during the respective fiscal years: agreements are firm, noncancelable, and unconditional commitments. The Company may be subject to penalties, and may lose important suppliers, if it is unable to meet its purchase commitments. In 2014, the Company entered into several long-term fixed price contracts to purchase parts to produce certain products. These contracts represent firm purchase commitments which are evaluated for potential market value losses. The Company estimated a loss on these firm purchase commitments with reference

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to the estimated future sales price of these products and cannot be attributed to a particular segment and are recognized a provision for inventory purchase incurred by all segments; commitments of $4,106 in 2014. The provision is • CWI which serves the medium- to heavy-duty engine recognized in other payables in accounts payable and markets with spark ignited natural gas engines. The fuel accrued liabilities [note 12]. During 2015, no additional loss for CWI engines is typically carried on vehicles as for provision for inventory purchase commitments was compressed natural gas or liquefied natural gas; and accrued and the provision has been drawn down to $2,050. • WWI develops, manufactures, and sells advanced, alternative fuel engines and parts that are widely used 23. SEGMENT INFORMATION in city bus, coach, and heavy-duty truck applications in China or exported to other regions globally. During the first quarter of 2015, Westport realigned the structure of the company's internal organization. The The accounting policies for the reportable segments are realignment combines, our historical operating segments, consistent with those described in note 2. The CODM Westport Applied Technologies, Westport On-Road evaluates segment performance based on the net operating Systems and Westport Off-Road Systems into a single income (loss), which is before income taxes and does not operating segment, Westport Operations. This change include depreciation and amortization, impairment reflects the manner in which operating decisions and charges, foreign exchange gains and losses, bank charges, assessing business performance is currently managed by interest and other expenses, interest and other income, the Chief Operating Decision Makers (the CEO and the and gain on sale of long-term investments. The Company COO “CODMs”). As Westport narrows its focus within did not record any intersegment sales or transfers for the certain business units, including its investments in joint year ended December 31, 2015, December 31, 2014 and ventures, and defers certain products and related December 31, 2013. programs, the CODMs manage the combined businesses as a whole. Therefore, the Westport Operations segment provides more meaningful information to users of Westport’s financial statements. All comparable periods presented have been revised to reflect this change.

The financial information for the Company’s business segments evaluated by the CODMs includes the results of CWI and WWI as if they were consolidated, which is consistent with the way Westport manages its business segments. As CWI and WWI are accounted for under the equity method of accounting, an adjustment is reflected in the tables below to reconcile the segment measures to the Company’s consolidated measures.

The Company’s business operates in four operating segments:

• Westport Operations designs manufactures and sells compressed natural gas, liquefied natural gas, and liquefied petroleum gas components and systems to over 20 global OEMs, and to aftermarket customers in over 60 countries.

• Corporate and Technology Investments, which includes corporate costs such as research and development, general and administrative, marketing, interest and other charges, foreign exchange and depreciation that

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 65 FINANCIAL STATEMENTS » NOTES » 23. SEGMENT INFORMATION

SEGMENT INFORMATION regions. Product and service and other revenues are Years ended Dec 31 attributable to geographical regions based on location of 2015 2014 2013 the Company’s customers and presented as a percentage of Revenue the Company’s product and service revenues are as Westport Operations $ 100,108 $ 126,988 $ 151,615 follows: Corporate and Technology Investments 3,196 3,581 12,417 CWI 331,882 337,234 310,651 REVENUE BY REGION WWI 185,967 618,465 466,580 % of total product revenue and service and other revenue, years ended Dec 31 Total segment revenues 621,153 1,086,268 941,263 2015 2014 2013 Less: equity investees' revenue (517,849) (955,699) (777,231) Americas Total consolidated revenues $ 103,304 $ 130,569 $ 164,032 (including United States) 28% 40% 42% Net consolidated operating income (loss) excluding depreciation Asia (including China) 16% 12% 11% and amortization, losses on impairments, write-downs and Other (including Italy) 56% 48% 47% disposals, provision for inventory purchase commitments, foreign exchange loss (gain), bank charges and other Westport Operations $ (15,230) $ (22,379) $ (67,426) The Company’s revenue earned from Canadian customers Corporate and Technology is not significant and has been included in revenue from Investments (70,254) (87,363) (83,546) CWI 51,011 21,555 23,539 sales in the Americas. WWI 3,784 78,502 14,496 As at December 31, 2015, total goodwill of $3,008 Total segment operating loss (30,689) (9,685) (112,937) Less: equity investees’ operating income (54,795) (100,057) (38,035) (December 31, 2014 - $23,352) was allocated to the Net consolidated operating loss Westport Operations segment. excluding depreciation and amortization, losses on impairments, write-downs and disposals, provision for As at December 31, 2015, total long-term investments of inventory purchase commitments, foreign exchange (gain) loss, bank $30,565 (December 31, 2014 - $32,898) was allocated to charges and other (85,484) (109,742) (150,972) the Corporate segment and $546 (December 31, 2014 - Depreciation and amortization $426) was allocated to Westport Operations. Westport Operations 6,625 13,573 11,474 Corporate and Technology Total assets are allocated as follows: Investments 7,029 5,093 4,814 Provision for inventory purchase commitments (Westport Operations) — 4,106 — TOTAL ASSETS

Losses on impairments, Dec 31, 2015 Dec 31, 2014 write-downs and disposals Westport Operations $ 157,452 $ 219,261 Corporate and Technology Corporate and Technology Investments — 3,458 31,564 Investments and unallocated assets 52,200 116,588 Westport Operations 22,722 26,146 9,959 CWI 171,189 172,941 36,376 52,376 57,811 WWI 125,724 182,215 Net consolidated operating loss before foreign exchange (gain) loss, bank 506,565 691,005 charges and other (121,860) (162,118) (208,783) Less: equity investees’ total assets 296,913 355,156 Foreign exchange (gain) loss, bank charges and other (11,223) (2,730) (14,573) Total consolidated assets $ 209,652 $ 335,849 Loss from operations (110,637) (159,388) (194,210) Interest on long-term debt and other The Company’s long-lived assets consist of property, plant income (expenses), net (5,337) (5,032) (3,771) Income from investment accounted for and equipment, intangible assets and goodwill (included in by the equity method 18,317 14,222 13,444 intangible assets below). Loss before income taxes $ (97,657) $ (150,198) $ (184,537)

Total additions to long-lived assets excluding business combinations Westport Operations $ 1,350 $ 2,278 $ 20,871 Corporate and Technology Investments 3,495 7,971 5,579 Total Additions $ 4,845 $ 10,249 $ 26,450

It is impracticable for the Company to provide geographical revenue information by individual countries; however, it is practicable to provide it by geographical

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Long-lived assets information by geographic area: CONTRACTUAL OBLIGATIONS & COMMITMENTS Years Carrying Contractual LONG-LIVED ASSETS BY REGION amount cash flows < 1 1–3 4–5 5+ Fixed Intangible Accounts Assets Assets Total payable & accrued liabilities $ 57,454 $ 57,454 $ 57,454 $ — $ — $ — December 31, 2015 Unsecured Italy $ 6,212 $ 19,531 $ 25,743 subordinated debentures (1) 38,359 45,999 3,577 42,422 — — Netherlands 2,952 5,135 8,087 Senior (2) 9,123 9,428 6,303 1,804 669 652 Canada 18,875 494 19,369 financing Senior United States 14,210 — 14,210 revolving financing (3) 10,859 11,423 282 11,141 — — Sweden 124 — 124 Other bank China 7,059 — 7,059 financing (4) 3,312 3,612 1,968 238 91 1,315 Australia 708 155 863 Capital lease obligations 794 830 369,000 441 20 — 50,140 25,315 75,455 Operating lease Less: equity investees' long commitments — 56,535 3,334 8,021 9,413 35,767 lived assets 7,613 — 7,613 Royalty Total consolidated long-lived payments (5) — 14,393 1,360 1,950 1,950 9,133 assets $ 42,527 $ 25,315 $ 67,842 $119,901 $ 199,674 $74,647 $66,017 $12,143 $46,867

December 31, 2014 1. Includes interest at 9%. Italy $ 9,084 $ 44,139 $ 53,223 2. Includes interest at rates disclosed in note 13(b) of the annual financial statements in effect at at December 31, 2015. Netherlands 3,729 6,245 9,974 3. Includes interest at rates disclosed in note 13(c) of the annual Canada 24,410 673 25,083 financial statements in effect at December 31, 2015. United States 20,386 — 20,386 4. Includes interest at rates disclosed in note 13(d) in effect at Sweden 208 — 208 December 31, 2015. China 6,329 — 6,329 5. The Company is obligated to pay annual royalties equal to the Australia 1,018 215 1,233 greater of CDN $1.4 million or 0.33% of the Company's gross annual revenue from all sources, including CWI, provided that 65,164 51,272 116,436 gross revenue exceeds CDN $13.5 million in any Less: equity investees' long aforementioned fiscal year, until a total of CDN $28.2 million has lived assets 7,030 — 7,030 been paid. The Company has assumed the minimum required Total consolidated long-lived payments. assets $ 58,134 $ 51,272 $ 109,406 c. Credit Risk

24. FINANCIAL INSTRUMENTS Credit risk arises from the potential that a counterparty to a financial instrument fails to meet its contractual a. Financial Risk Management obligations and arises principally from the Company’s cash The Company has exposure to liquidity risk, credit risk, and cash equivalents, short-term investments and foreign currency risk and interest rate risk. accounts receivable. The Company manages credit risk associated with cash and cash equivalents and short-term b. Liquidity Risk investments by regularly consulting with its current bank and investment advisors and investing primarily in liquid Liquidity risk is the risk that the Company will not be able short-term paper issued by Schedule 1 Canadian banks, R1 to meet its financial obligations as they are due. The rated companies and governments. The Company Company has sustained losses and negative cash flows monitors its portfolio, and its policy is to diversify its from operations since inception. At December 31, 2015, investments to manage this potential risk. the Company has $27,839 of cash, cash equivalents and short-term investments. The Company is also exposed to credit risk with respect to uncertainties as to timing and amount of collectability of The following are the contractual maturities of financial accounts receivable and loans receivable. As at obligations as at December 31, 2015: December 31, 2015, 85% (December 31, 2014 - 86%) of accounts receivable relates to customer receivables, and 15% (December 31, 2014 - 14%) relates to amounts due from joint venture and indirect, income tax and value

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 67 FINANCIAL STATEMENTS » NOTES » 24. FINANCIAL INSTRUMENTS

added taxes receivables. In order to minimize the risk of subject to interest rate risk on certain long-term debt with loss for customer receivables, the Company’s extension of variable rates of interest. The Company limits its exposure credit to customers involves review and approval by senior to interest rate risk by continually monitoring and management as well as progress payments as contracts are adjusting portfolio duration to align to forecasted cash executed. Most sales are invoiced with payment terms in requirements and anticipated changes in interest rates. the range of 30 days to 90 days. The Company reviews its If interest rates for the year ended December 31, 2015 had customer receivable accounts and regularly recognizes an increased or decreased by 50 basis points, with all other allowance for doubtful receivables as soon as the account is variables held constant, net loss for the year ended determined not to be fully collectible. Estimates for December 31, 2015 would have increased or decreased by allowance for doubtful debts are determined on a $69. customer-by-customer evaluation of collectability at each balance sheet reporting date, taking into consideration f. Fair Value of Financial past due amounts and any available relevant information on the customers’ liquidity and financial position. Instruments The carrying amounts reported in the balance sheets for The carrying amount of cash and cash equivalents, short- cash and cash equivalents, accounts receivable, accounts term investments and accounts receivable as at payable and accrued liabilities and loan payable December 31, 2015 of $66,163 (December 31, 2014 - approximate their fair values due to the short-term period $140,854) represents the Company’s maximum credit to maturity of these instruments. exposure. The Company’s short-term investments are recorded at d. Foreign Currency Risk fair value. The long-term investment represents our Foreign currency risk is the risk that the fair value of future interests in the CWI, WWI and other equity accounted for cash flows of financial instruments will fluctuate because investees, which are accounted for using the equity of changes in foreign currency exchange rates. The method. Company conducts a significant portion of its business The carrying value reported in the balance sheets for activities in foreign currencies, primarily the United States obligations under capital lease, which is based upon dollar (“U.S.”) and the Euro (“Euro”). Cash and cash discounted cash flows, approximates its fair value. equivalents, short-term investments, accounts receivable, accounts payable, and long-term debt that are The carrying value reported in the balance sheet for the denominated in foreign currencies will be affected by unsecured subordinated debenture notes [note 13(a)] is changes in the exchange rate between the Canadian dollar greater than its fair value based on a recent financing the and these foreign currencies. Company performed with the Cartesian Group [note 25]. The approximate fair value of the unsecured subordinated The Company’s functional currency is the Canadian dollar. debenture notes at December 31, 2015 is approximately The U.S. dollar amount of financial instruments subject to $32,500 (CDN $44,900). Additionally, the interest rate on exposure to foreign currency risk in the consolidated the notes approximates the interest rate being demanded balance sheet at December 31, 2015 is as follows: in the market for debt with similar terms and conditions.

FOREIGN CURRENCY RISK IN BALANCE SHEET The carrying value reported in the balance sheet for senior U.S. dollars financing agreements [note 13(b and c)] approximates their Cash and cash equivalents $ 15,289 fair values as at December 31, 2015, as the interest rates on Short-term investments — the debt is floating and therefore approximates the market Accounts receivable 6,710 rates of interest. The Company’s credit spread in these Accounts payable 4,604 subsidiaries also has not substantially changed from the premiums currently paid.

e. Interest Rate Risk The Company categorizes its fair value measurements for items measured at fair value on a recurring basis into three Interest rate risk is the risk that the fair value of future categories as follows: cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is

68 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT FINANCIAL STATEMENTS » NOTES » 24. FINANCIAL INSTRUMENTS

LEVEL 1 Cartesian. The minimum fixed payments result in an Unadjusted quoted prices in active markets for identical effective interest rate of approximately 23% using this assets or liabilities. method. The effective interest rate actually required to be utilized could be higher if future joint venture earnings LEVEL 2 and, or future product sales are higher than the minimum Observable inputs other than Level 1 prices such as quoted fixed payments stipulated in the agreement. prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are b. Merger with Fuel Systems observable or can be corroborated by observable market data Solutions, Inc. for substantially the full term of the assets or liabilities. On September 1, 2015, the Company announced a LEVEL 3 proposed business combination (the "Merger") with Fuel Inputs for the asset or liability that are not based on Systems Solutions, Inc. (“Fuel Systems”). Under the observable market data (unobservable inputs). terms of the Merger, the Company will acquire all of the outstanding shares of Fuel Systems common stock in a When available, the Company uses quoted market prices to stock-for-stock transaction under which Fuel Systems determine fair value and classify such items in Level 1. shareholders will receive 2.129 Company shares for each When necessary, Level 2 valuations are performed based share of Fuel Systems common stock they own at closing. on quoted market prices for similar instruments in active markets and/or model-derived valuations with inputs that On March 7, 2016, the Company signed an Amendment to are observable in active markets. Level 3 valuations are the Agreement and Plan of Merger (the “Amendment”) undertaken in the absence of reliable Level 1 or Level 2 in relation to the Merger between the Company and Fuel information. Systems. The exchange ratio of the Agreement has been amended to include a collar mechanism. In the event that As at December 31, 2015, cash and cash equivalents and the NASDAQ volume weighted average price ("VWAP") of short-term investments are measured at fair value on a the Company common shares during a specified measuring recurring basis and are included in Level 1. period is equal to or greater than $2.37, then Fuel Systems stockholders will receive 2.129 Company common shares 25. SUBSEQUENT EVENTS per Fuel Systems share on closing of the Merger and through the exchange process. In the event that the a. Cartesian Financing Company’s VWAP is equal to or less than $1.64, then Fuel Systems stockholders will receive approximately 3.08 On January 11, 2016, Westport announced that it had Company common shares per Fuel Systems share on entered into a financing agreement with Cartesian Capital closing of the Merger and through the exchange process. In Group ("Cartesian") to support global growth initiatives. the event that the Company's VWAP is greater than $1.64 The financing agreement immediately provided $17,500 in and less than $2.37, then Fuel Systems stockholders would non-dilutive capital (the "Tranche 1 Financing"). In receive a number of Company common shares per Fuel consideration for the funds provided to Westport, Systems share equal to dividing $5.05 by the Company’s Cartesian is entitled to payments in respect of the Tranche VWAP, rounded to four decimal places. The measuring 1 Financing based on the greater of period will be the ten consecutive trading days ending on i. a percentage of amounts received by Westport on and including the trading day five business days prior to select HPDI and joint venture products in excess of the anticipated closing date. agreed thresholds through 2025 and On March 18, 2016, the Company announced that its ii. stated fixed amounts per annum. shareholders approved the issuance of such number of The carrying value is being accreted to the expected Company common shares as required to complete the redemption value using the effective interest method. Merger.

The payments owing to Cartesian in respect of the Tranche The Merger requires certain regulatory approvals and 1 Financing are accounted for using the effective interest approval by a majority of the shareholders of Fuel Systems. method with a notional interest rate being calculated All substantive regulatory approvals have been received. based on the minimum fixed payments owing to The Merger is currently anticipated to close in April 2016.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 69 INFORMATION FOR SHAREHOLDERS

DIRECTORS & EXECUTIVE OFFICERS ANNUAL MEETING OF Start Committees SHAREHOLDERS Name / position Residence date AU HR NC Ashoka Achuthan Chicago, Nov WHEN: Tuesday, June 28, 2015 at 10:00 AM (Pacific) CFO Illinois 2013 WHERE: 1750 West 75th Avenue, Suite 101, Vancouver, BC Jim Arthurs North Vancouver, Jan Executive Vice President British Columbia 2014 Warren J. Baker Avila Beach, Sep WESTPORT ON THE INTERNET Chairman & Director California 2002 •• Joseph P. Caron West Vancouver, Aug Topics featured can be found on our websites: Director British Columbia 2014 • David R. Demers Vancouver, Mar WESTPORT westport.com CEO & Director British Columbia 1995 FUEL FOR THOUGHT (BLOG) blog.westport.com Brenda J. Eprile North York, Oct YOUTUBE youtube.com/westportdotcom Director Ontario 2013 ••• FACEBOOK facebook.com/westportdotcom Nancy S. Gougarty Vancouver, Feb President & COO British Columbia 2013 TWITTER twitter.com/westportdotcom Philip B. Hodge Calgary, Jun CUMMINS WESTPORT cumminswestport.com Director Alberta 2012 • Dezsö J. Horváth Toronto, Sep The information on these websites is not incorporated Director Ontario 2001 ••• Gottfried (Guff) Muench West Vancouver, Jul by reference into this Annual Report. Financial results, Director British Columbia 2010 • Annual Information Form, news, services, and other Rodney T. Nunn Chatham, Mar Director Ontario 2016 activities can also be found on the Westport website, on Thomas G. Rippon White Rock, Sep SEDAR at sedar.com, or at the SEC at sec.gov. Executive Vice President British Columbia 2013 Shareholders and other interested parties can also sign Peter M. Yu New York City, Jan up to receive news updates in a variety of formats Director New York 2016 • Committees are as follows: AU = Audit; HR = Human Resources & including email, Twitter, and RSS feeds: Compensation; NC = Nominating & Corporate Governance westport.com/contact/subscriptions CORPORATE INFORMATION CONTACT INFORMATION 1750 West 75th Avenue, Suite 101 STOCK LISTINGS Vancouver, British Columbia, Canada V6P 6G2 NASDAQ WPRT T 604-718-2000 » F 604-718-2001 Toronto Stock Exchange WPT [email protected] Westport Shareholder Services FORWARD LOOKING Shareholders with questions about their account— STATEMENTS including change of address, lost stock certificates, or This document contains forward-looking statements about Westport’s business, receipt of multiple mail-outs and other related inquiries operations, technology development, products, the performance of our products, —should contact our Transfer Agent and Registrar: sources of revenue, our future market opportunities and/or about the environment in which it operates, which are based on Westport’s estimates, Computershare Trust Company of Canada forecasts, and projections. Such forward looking statements include, but are not limited to, statements concerning returns to shareholders, competitive pressures 510 Burrard Street, 2nd Floor on our industry and future consolidation and alliances in that industry, changes Vancouver, British Columbia, Canada V6C 3B9 in adjusted EBTIDA results, our focus for the year ahead, and impacts of climate change. These statements are not guarantees of future performance and involve T 604-661-9400 » F 604-661-9401 risks and uncertainties that are difficult to predict, or are beyond Westport’s control and may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, Legal Counsel performance or achievements expressed in or implied by these forward looking Bennett Jones LLP, Calgary, Alberta, Canada statements. These risks include risks relating to the timing and demand for our products, future success of our business strategies and other risk factors described in our most recent Annual Information Form and other filings with Auditors securities regulators. Consequently, readers should not place any undue reliance on such forward-looking statements. In addition, these forward-looking KPMG LLP, Independent Registered Public Accounting statements relate to the date on which they are made. Westport disclaims any Firm, Vancouver, British Columbia, Canada intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise except as required by applicable legislation.

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WESTPORT » 1750 West 75th Avenue, Suite 101 » Vancouver, BC, Canada V6P 6G2 » +1 604-718-2000 » [email protected] » westport.com